Research into new therapies for incurable and life-threatening diseases have suffered a blow with a European court ruling that procedures that use embryonic stem cells cannot be patented.

Senior scientists were dismayed by the judgment on Tuesday, which outlaws patents on stem cell techniques that involve the destruction of embryos. They fear it will hamper research and stifle commercial investment.

Medical researchers around the world use stem cells from stores created from surplus IVF embryos. These embryos are donated by couples who have completed their fertility treatment and would otherwise be routinely destroyed by clinics.

The unique ability of embryonic stem cells to grow into almost any tissue in the body has led scientists to investigate whether they can regenerate damaged and diseased organs, and treat serious conditions ranging from blindness and dementia to paralysis.

Sir Ian Wilmut, who led the team that cloned Dolly the sheep, said the decision was "very much to be regretted".

"It will unfortunately make it less likely that companies in Europe will invest in the research to develop treatments to use embryonic stem cells for treatment of human diseases," he said.

Wilmut, who is director of the MRC Centre for Regenerative Medicine at Edinburgh University, added: "Sadly this judgment may mean that initial research carried out in Europe, in some cases with European funds, will be more likely to be developed and used in other parts of the world."

The decision from the European court of justice is a legal clarification for a court case brought by Greenpeace against a German scientist, Oliver Brüstle, who patented a way to turn stem cells into healthy brain cells. The environmental group argued that Brüstle's work was "contrary to public order" because embryos were destroyed to gather the stem cells used.

The judgment effectively supports the Greenpeace view and imposes a ban on patenting work that uses embryonic stem cells on the grounds that it represents an immoral "industrial" use of human embryos.

Brüstle, director of the Institute for Reconstructive Neurobiology at Bonn University, said the ruling "wiped out" years of research by stem cell scientists in Europe. Others warned the judgment would see breakthroughs made in Europe exploited in the US and elsewhere.

Austin Smith, head of the Wellcome Trust Centre for Stem Cell Research at Cambridge University, said the decision left European scientists in a "ridiculous position".

"We are funded to do research for the public good, yet prevented from taking our discoveries to the market place where they could be developed into new medicines. One consequence is that the benefits of our research will be reaped in America and Asia," he said.

The court was asked to clarify three issues arising from vague phrasing in the EU biotechnology directive. These included the definition of an embryo, whether scientific research constituted "industrial or commercial purposes", and whether procedures that indirectly involved embryonic stem cells were patentable.

The judgment states that any fertilised human egg is an embryo, that scientific research does fall within the scope of industrial or commercial purposes, and that the ban applies to any procedure that draws on stem cells created by destroying embryos. The ruling is binding across all member states.

While the decision may lead to less funding from venture capitalists for embryonic stem cell research in Europe, the impact may not be as damaging as many scientists fear. Embryonic stem cells make up only a small portion of all stem cell research. Of more than 2,000 clinical trials under way into cell-based therapies, only two involve stem cells derived from embryos.

"This is an unwelcome judgment, but for reasons that are specific to the sector, I think the practical ramifications will be limited," said Alex Denoon at Lawford Davies Denoon, a London-based law firm that specialises in stem cell regulation. "I suspect that inventors and patent attorneys will find ways around some of this."

Even without patent protection, said Denoon, companies that develop stem cell therapies are unlikely to face competition from rivals that copy their work, because of the difficulty in getting regulatory approval. The decision would not affect Europeans disproportionately, because stem cell research was a global sector, he added.

Chris Mason of the UK National Stem Cell Network agreed, adding that while the judgment was unwelcome, stem cell researchers faced more serious funding and manufacturing problems.

"This decision is important and it creates uncertainty, which is a problem in itself, but it is not as big as the other barriers we are grappling with. Funding is a major issue and that has to come from central government. Then there is manufacturing, in that we need to make these therapies at a scale and price that works," Mason said. "This is not a bolt from the blue, and I think people will be able to work around it. Does it impact upon potential therapies? The answer has to be no."