In a setback for the Bush administration's secretive Terrorist Surveillance Program, a federal judge in San Francisco on Thursday denied a government motion to quash a warrantless-wiretapping lawsuit against AT&T.

U.S. Northern District Judge Vaughn R. Walker rejected the government's claim that allowing the suit to proceed would compromise state secrets.

In a 72-page order, which attorneys for the plaintiffs called a victory, Walker wrote that dismissing the case at this early stage ``would sacrifice liberty for no apparent enhancement of security.''

The ruling rejected the government's claim that the very existence of the super-secret National Security Agency (NSA) eavesdropping program was a state secret requiring dismissal of the case. Walker cited numerous newspaper stories, testimony by the U.S. attorney general and statements by President Bush to rebut that claim.

Walker is the first judge to rule in lawsuits filed in federal courts in Michigan, Illinois and elsewhere around the country against the program, the existence of which was disclosed in December by the New York Times. The government has since admitted monitoring domestic communications in which one party is outside the country, but says it's a targeted effort to identify Al-Qaida agents in the United States. But its critics claim that the program is an electronic dragnet that invades the privacy of millions of Americans by monitoring their phone calls and Internet communications.

The ruling means that the Electronic Frontier Foundation (EFF), a non-profit privacy group that brought the class-action lawsuit on behalf of AT&T customers, may soon begin asking AT&T to produce evidence. But first, the judge said he wants to appoint an expert to ``disentangle sensitive information from non-sensitive information'' and determine whether evidence would compromise national security if it is produced in court.

EFF sued AT&T in January for allegedly violating the First and Fourth Amendments by illegally helping the NSA intercept its customers' communications, and for violating various federal statutes concerning covert government eavesdropping programs.

A Department of Justice official said it is reviewing the judge's ruling and has made no determination as to what its next step will be in the case.

The government had argued that ``the very subject matter'' of the case involves a state secret, and that even if the court found AT&T to have violated the law, it couldn't award damages because that would confirm the allegations and disclose the secret.

The government can appeal the order to the 9th Circuit Court of Appeals. But in crafting it, Walker adhered closely to rules established by earlier cases for granting state-secret dismissals. It is simply too early in the case to do so, he ruled.

An AT&T motion for dismissal on several grounds, including an argument that the plaintiffs had not shown any injury to them from the program, was also denied.

``We are reviewing Judge Walker's order and evaluating possible next steps,'' said AT&T spokesman Walt Sharp. ``At AT&T, we prize our customers' privacy and we also recognize our obligation to assist law enforcement agencies. AT&T is fully committed to protecting our customers' privacy, and we would not provide customer information to any government agency except as specifically authorized under the law.''

After media reports of a warrantless eavesdropping program, Bush admitted he had authorized the eavesdropping after the terrorist attacks of 2001.

AT&T says it's caught in the middle between the government and civil liberties advocates and has no way to defend itself because of national security restrictions.

The Bush administration has been adamant in insisting that the program was constitutional under the president's wartime authority. But it agreed last week to a compromise bill drafted by Sen. Arlen Specter, R-Pa., that would let the administration submit the program to a review by a special court established by the Foreign Intelligence Surveillance Act.

Attorneys for the EFF said they hope Congress takes note of the ruling.

``This really vindicates that it's important to have judges around the country and not have cases consolidated in secret court in Washington,'' said Robert Fram, a lawyer with Heller Ehrman in San Francisco, which argued the state-secrets issue before Walker.

Walker's order said, ``The plaintiffs appear to be entitled to at least some discovery.'' He said discovery could proceed regarding the content of intercepted communications. The government ``has opened the door'' by its public statements, he said. He did not permit discovery at the present time on whether AT&T was turning over customers' call records to the government, because the government has been less forthcoming about that.

Walker held open the possibility that he may grant a motion for dismissal by AT&T ``at some point,'' if he finds that evidence essential to the company's defense is blocked on national security grounds.

But the judge was unwilling to cede that now.

He wrote that ``it is important to note that even the state-secrets privilege has its limits. While the court recognizes and respects the executive's constitutional duty to protect the nation from threats, the court also takes seriously its constitutional duty to adjudicate the disputes that come before it.''

``The compromise between liberty and security remains a difficult one,'' he added. ``But dismissing this case at the outset would sacrifice liberty for no apparent enhancement of security.''

The next hearing by the San Francisco court is scheduled for Aug. 8 to establish a procedure for producing sensitive evidence and appointing an expert to help the court.