ewham argued the branch of Paddy Power planned in East Ham would attract crime and anti-social behaviour and so would be in breach of the 2005 Gambling Act. The betting firm had made the application for a licence to operate on Green Street in East Ham in February.
Following the ruling at Thames Magistrates' Court, the council said it would review the judgement and consider its next step. Giving his judgement, District Judge Paul Goldspring said: "It has not been proved that the granting of the licence would not be reasonably consistent with [the] objective of preventing crime and disorder and therefore I disagree with the decision of the [council's] sub-committee and, in light of the evidence before me, it was wrong."
The local authority has said it was "deeply disappointed" and will explore whether there is scope for "judicial review".
Councillor Ian Corbett, executive member for environment, said: "If nothing else, this case has exposed a serious problem and woken up the rest of the country to the fact that the current laws will not prevent the march of the high street bookmakers.
"Taking legal action at a time when our services are under severe pressure is something we have been forced to do because the Gambling Commission refuses to act as a regulator. Ministers fail to understand how the legislation is toothless in dealing with the clustering of betting shops and the proliferation of high stakes gaming machines."
The betting firm said it was pleased with the ruling. "We welcome the fact that the confusion surrounding primary activity has been clarified, with Newham conceding during the proceedings that the 2005 Gambling Act relates only to whether an operator provides genuine facilities for betting. Paddy Power makes a positive contribution to local communities in which it operates. Paddy Power is a responsible operator that takes proactive measures to offer a safe and responsible leisure experience for its customers and the community."