The court said that the law, which came into effect on October 5, goes against the Basic Law (the city's constitution), Efe news reported citing public broadcaster Radio Television Hong Kong as saying.
"We should also make it clear that it is not our judgment that (an) 'anti mask' law is generally objectionable or unconstitutional. Its validity must, however, depend on the details of the legislation and the particular societal aims sought to be pursued by the measure," the court's judges said.
"We consider it to be clear that the measure adopted exceeds what is reasonably necessary to achieve the aim of law enforcement, investigation and prosecution of violent protesters even in the prevailing turbulent circumstances in Hong Kong," they added.
However, the 106-page ruling recognizes the police's right to ask people to remove their masks and adds that refusal to do so could lead to six months in prison or a HK$10,000 ($1,280) fine.
In order to impose a ban on masks, the government invoked the colonial-era Emergency Regulations Ordinance (ERO), which had not been implemented since 1967 and which grants the government widespread powers without having to go through the legislative.
Using its emergency powers, the government declared the use of masks in protests a crime punishable by up to a year in prison and fines of up to HK$25,000.
The controversial law seeks to force protesters to stop wearing masks as a way to hide their identities and thereby speed up police efforts to arrest protesters.
A group of 24 pro-democracy lawmakers and former legislator Leung Kwok-hung had filed an appeal against the law saying that the government had gone too far and that it was undermining fundamental freedoms.
A large number of young people taking part in the protests that have been taking place in the city since June have used handkerchiefs to cover their faces, as well as Guy Fawkes masks.
Many people in the city were wary of the ban as they feared the government would end up invoking the ERO to ask for power to authorize arrests, censor the media, change laws or take total control of transport.
Since its approval, activists have taken to the streets on numerous occasions wearing masks in defiance of the government's ban.
( With inputs from IANS )