Anwar immediately called the court's decision "a gross injustice", with his lawyers saying they would appeal.

He lodged the defamation suit in January last year after Mahathir said he could not allow his former deputy to become prime minister because he was a homosexual.

Mahathir's lawyers in January applied to strike out the suit, filing a 48-page affidavit in which Mahathir accused Anwar of aspiring to become prime minister and using the suit to "rehabilitate himself for high office."

"The plaintiff's action is unsustainable based on background evidence...and the defendant's application (Mahathir) to strike out is therefore allowed with costs," said High Court judge Tengku Maimon Tuan Mat.

Neither Mahathir nor Anwar was present in court but Anwar later issued a statement in which he said the judge "has chosen to ignore the overwhelming body of legal arguments that I have presented to the court" as to why Mahathir should answer the suit.

"Under the circumstances, I am compelled to say that this decision is utterly devoid of any legal merit," Anwar said.

Anwar's lawyer said the former deputy prime minister would appeal.

"I have informed Anwar Ibrahim of the decision and he is indeed quite upset and he has instructed that we file an appeal as we are dissatisfied with the decision," lawyer Sankara Nair told reporters.

Anwar was heir apparent to Mahathir until his sacking in 1988 after sodomy and corruption charges that landed him in jail for six years. The sodomy conviction was later overturned but the corruption verdict stands, barring Anwar from standing for public office until April 2008.

"I cannot have a person who is like that in my cabinet who may succeed and become the prime minister. Imagine having a gay prime minister. Nobody would be safe," Mahathir told reporters in September 2005.

The lawsuit said Mahathir's "falsely and maliciously" made comments were widely reported by the media, causing "irreparable damage" to Anwar's reputation.