A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit ruled unanimously that the Environmental Protection Agency had overstepped its authority in instituting a rule that would have established a cap-and-trade system for soot and smog.

Known as the Clean Air Interstate Rule, it represented the Bush administration's most aggressive action to clean the air over the next two decades. The EPA estimated the rule would help prevent 17,000 premature deaths and reduce levels of sulfur dioxide and nitrogen oxides up to 70 percent by 2025.

But the court found that the EPA had committed "more than several fatal flaws" in creating the measure, which was challenged by several power companies and North Carolina for a variety of contrasting reasons.

"No amount of tinkering with the rule or revising of the explanations will transform CAIR, as written, into an acceptable rule," according to the unanimous 60-page opinion.

EPA Administrator Stephen Johnson said that "we are extremely disappointed in the court's decision because it's overturning one of the most protective [air-pollution] rules in our nation's history. . . . We'll wait and see what our next steps are."

Environmental groups said the decision would delay efforts to reduce harmful air pollution and leave tough decisions to be made by the next president and Congress. "This is probably the biggest air-quality setback ever suffered by the EPA under any administration," said John Walke, clean-air director for the National Resources Defense Council.

Charles McPhedran, of Citizens for Pennsylvania's Future, said that "utility pollution, especially coal pollution, is a big part of why we have air-pollution problems in Philadelphia. . . . This rule would have provided regional benefits across most of the eastern U.S. Now, we are going to have to scramble to find substitutes."

Lisa Jackson, New Jersey's environmental protection commissioner, agreed. "Now we have nothing," she said. "We've got to start all over."

The rule was one of the Bush administration's signature air-pollution policies. It would have required Pennsylvania, New Jersey, 26 other states, and the District of Columbia to make reductions in emissions of nitrogen oxides and sulfur dioxide from power plants. It established a cap-and-trade system that would have allowed utilities to sell and buy pollution credits as long as total industry emissions remained below a preset cap.

While several environmental groups criticized the rule for not setting stiffer limits, they welcomed the measure, saying it was the best they could expect from the Bush administration. Many power companies also supported the rule because it was not as costly as some proposals in Congress.

William M. Bumpers, an attorney with Baker Botts L.L.P., said most electric-generating companies he represented supported the rule. Some made large investments to upgrade their coal-fired plants, assuming the rule would remain. "This is a trainwreck for the EPA, and it's a trainwreck for the environment," he said.

Among the challenges to the rule were that the EPA did not have the legal right to establish its plan and that pollution limits were arbitrary.

In agreeing with many of the arguments, the judges said the EPA's regional cap system was "fundamentally flawed" because it had not set any state-specific emissions requirements. They also ruled that the "trading program is unlawful, because it does not connect states' emissions reductions to any measure of their own significant contributions."

The ruling said that the EPA improperly had tied limits on sulfur-dioxide emissions to the 1990 legislation passed by Congress to deal with acid rain, and that it had based the regional-pollution caps on "irrelevant factors." The judges said that the EPA "must redo its analysis from the ground up."