Transgender activists celebrate outside the court of appeals in Putrajaya on Friday. Three Malaysian transgender women won their landmark bid to overturn an Islamic anti-cross dressing law on Friday (AFP Photo/Mohd Rasfan)

Three Malaysian transgender women on Friday won their landmark bid to overturn an Islamic anti-cross dressing law in the conservative Muslim-majority nation.

A three-judge appeals court panel ruled that the provision of southern Negri Sembilan state that bars Muslim men from dressing as women was unconstitutional, saying it "deprives the appellants of the right to live with dignity".

"It has the effect of denying the appellants and other sufferers of GID [gender identify disorder] to move freely in public places... This is degrading oppressive and inhumane," judge Hishamudin Yunus said.

The verdict overturns a 2012 lower court ruling, which had dismissed the challenge by the three appellants — Muslims who were born male but identify as women — over their arrest four years ago under the law.

Malaysia has a double track court system with state Islamic laws governing civil matters for Muslims, who account for 60 percent of the country's 30 million people.

Under state Islamic laws, the offense of men dressing or acting as women is punishable by up to three years in jail. Some Malaysian states also outlaw cross-dressing by women.

Aston Paiva, the plaintiffs' lawyer, said the ruling could be used to challenge any arrest of transgender people throughout Malaysia.

"It's quite historic... This will be a precedent... This court binds all other high courts," Paiva said.

A Negri Sembilan state legal advisor declined to comment on whether his side would seek to appeal the verdict to a higher court.

The three plaintiffs were not present in court.

The case is the first attempt to overturn the prohibition on cross-dressing in the Southeast Asian nation, where homosexuality and transgender lifestyles remain taboo.

Human Rights Watch (HRW) in September called on the government to repeal all laws that criminalize transgender lifestyles after the New York-based group found that they face systematic and constant repression, harassment, mistreatment, social ostracism and "risk arrest every day".

HRW said in a report that transgender people in Malaysia face worsening persecution due to the steady rise of conservative Islamic attitudes.

The abuses include arrest, physical and sexual assault and extortion by authorities, public shaming by forcing transgender women to strip off their clothing in public, and barriers to healthcare, employment and education.

Authorities face no accountability in their treatment of transgender people, the report said. AFP