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Human rights activists are outraged by the ruling and plan to appeal Britain's highest court. The judges ruled there was insufficient evidence of a "clear risk" of the weapons being used for "serious" rights breaches.
London's High Court ruled on Monday that the British government's arms sales to Saudi Arabia were lawful and could continue.
The case revolved around a part of the UK's Export Control Act, which states that the British government "will not grant a licence if there is a clear risk that the items might be used in the commission of a serious violation of International Humanitarian Law."
The Campaign Against Arms Trade (CAAT) - a group of NGOs including Oxfam, Amnesty International and Human Rights Watch - brought the case to the court, arguing that exports to Saudi Arabia currently breached this condition, given the likelihood of the weapons being used in the Saudi campaign in Yemen.
The plaintiffs slammed the court's ruling, saying they would appeal to the UK's Supreme Court. Oxfam said the decision "sets back arms control 25 years."
The CAAT had sought to block the export licenses for British-made fighter jets, bombs and other lethal weaponry they say the Saudi-led coalition is using - at least somewhat indiscriminately - in its military campaign against Houthi rebels in Yemen's civil war.
The case relied on classified material as well as publicly-available information. As a result parts of the hearing and verdict were closed to the public.
The Saudis had "sought positively to address concerns about International Humanitarian Law," the court said.
"Saudi Arabia has been, and remains, genuinely committed to compliance with International Humanitarian Law; and there was no 'real risk' that there might be 'serious violations' of International Humanitarian Law (in its various manifestations) such that UK arm sales to Saudi Arabia should be suspended or canceled," the court said.
The court also said that the classified information ("Closed material") brought forward in the case "provides valuable additional support for the conclusion that the decisions made by the Secretary of State not to suspend or cancel arms sales to Saudi Arabia were rational."
Ruling sparks outrage
Amnesty International described the ruling as a "deadly blow for Yemenis," while Save the Children said the evidence showing the Saudi-led coalition had repeatedly violated international humanitarian law in Yemen "is overwhelming."
The court also claimed that the British government had access to a "wider and qualitatively more sophisticated range of information than that available to the claimant's sources" - a reference to the classified foreign office and military intelligence used in the case.
But the plaintiffs rejected claims of the British government being better informed than aid agencies.
"The suggestion that human rights researchers were rarely or never on the ground in Yemen, or relied on 'second-hand information,'...is not true," Human Rights Watch said in a statement.
"It has been documented by UN reports, by aid groups on the ground and by credible human rights organizations," said a statement put out by Save the Children.
The UN annual report on Yemen's civil war, and the related sanctions, said the Saudi-led coalition acting in support of the Yemeni government had carried out attacks that "may amount to war crimes." Riyadh rejects those allegations.
Yemen's civil war erupted in 2015, pitting the exiled government of President Abd-Rabbu Mansour Hadi, against the Iran-backed Houthi group which controls most of northern Yemen, including the capital Sanaa. Saudi Arabia and its regional allies intervened in the conflict as forces loyal to Hadi neared outright defeat.
According to UN estimates, the conflict in Yemen has killed 10,000 people, mostly civilians, and wounded 40,000 as result of actions by all sides.
bik/msh (Reuters, AP, AFP, dpa)