The controversial Rule 45, introduced in 2008, banned athletes, including Olympic 400 meters champion LaShawn Merritt, from participating at the next Olympic Games if they have been suspended for six months or longer, but the regulation was rejected by CAS as invalid and unenforceable.
The Court's ruling means that American Merritt, the highest profile name affected by the decision, can now defend his title in London.
Merritt received a 21-month suspension after testing positive in 2009 and 2010 for a banned substance he said was found in an over-the-counter male enhancement product.
His ban ended in July and he competed at the world athletics championships in South Korea in August, winning the silver medal behind Grenada's Kirani James and gold in the 4x400m relay.
Merritt's lawyer said the Olymp ic champion was thrilled with the decision.
"He was really, really happy to have this question mark lifted," Howard Jacobs told Reuters in a telephone interview from Los Angeles.
"I think he is really energized to prepare for next year now."
The IOC, which had put the rule into place to act as a further deterrent for potential doping offenders, said it was disappointed and would seek tougher sentences in the future through the new WADA code.
It had argued the rule was not a further sanction but an eligibility rule in which the IOC decided who was taking part in their event.
"The IOC fully respects the Court of Arbitration for Sport and will of course abide by its judgment. The IOC has a zero tolerance against doping and has shown and continues to show its determination to catch cheats," the I OC said in a statement.
"We are therefore naturally disappointed since the measure was originally adopted to support the values that underpin the Olympic Movement and to protect the huge majority of athletes who compete fairly.
"When the moment comes for the revision of the World Anti-Doping Code we will ensure that tougher sanctions, including such a rule, will be seriously considered."
The verdict also allows dozens more athletes banned from winter Games under the same rule to make a return at the Sochi 2014 winter Olympics if their doping suspensions have ended by then.
The International Association of Athletics Federations (IAAF) estimated some 50 track and field athletes could be affected by the verdict.
"This is difficult to answer precisely because it requires a judgment to be made about who is likely to qualify for London on return from a doping ban. A reasonable estimate at this point would put the number at around 50," IAAF spokesman Nick Davies said.
"We do not believe that the CAS decision will have any adverse impact on the anti-doping movement. If the concern is about increased penalties for doping violations, then the possibility already exists under the World Code for sanctions of 2-4 years in serious doping cases if aggravating circumstances are present."
Davies said the IAAF would continue to review each case in athletics to see if it fitted into such a category.
"If there are to be fixed sanctions of more than two years (and the IAAF has advocated for that in the past) then this has likely to be incorporated within the World Code, the next revision process for which is underway shortly," he added.
OLYMPIC RETURN
Germany's most decorated winter Olympian, speedskater Claudia Pechstein, who was banned for two years in 2009 and wants to compete in next year's London Games in cycling and to race in the 2014 Games, said she was pleased by the decision.
"I am totally happy. There could not have been a different verdict. Justice has prevailed and now the path is clear for my tenth Olympic medal," she told reporters.
Cyclist David Millar, banned from all future Games under a similar British Olympic rule that could now be challenged, said he needed time to "digest" the news.
"CAS ruling on IOC Rule 45 a good thing for future of international sport. Only a matter of time till all countries respect WADA Code," he wrote on Twitter.
The British Olympic Association (BOA) will hold a news conferenc e later on Thursday on the verdict's impact on their own Olympic lifetime ban for doping offenders.
UK Anti-Doping chief executive Andy Parkinson said it was "appropriate" that the WADA code was the one determining punishment for drugs offenders.
"We believe it is appropriate that the decision from the Court of Arbitration for Sport strongly supports the authority of the World Anti-Doping Code, the internationally agreed set of rules," he said.
The IOC and the U.S. Olympic Committee (USOC) had asked CAS to decide on the rule, known more widely as the 'Osaka Rule'.
USOC CEO Scott Blackmun said: "This proceeding was handled with respect and professionalism from the outset as both parties sought clarity on the rule. Like the IOC, we are in full support of clean competition and stringent anti-doping penalties."
"This decision does not diminish our commitment to the fight against doping, but rather ensures that athletes and National Olympic Committees have certainty as they prepare for London."
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