The newspaper published a series of stories accusing the 50-year-old MP for Glasgow Kelvin, who was kicked out of the Labour Party, of receiving money from Saddam Hussein after its foreign correspondent found documents in Baghdad implicating the MP in April 2003.
It denied libel and pleaded the defence that the story was in the public interest and was published in good faith.
This is known as the "Reynolds defence", established by law lords as a legitimate defence in 1999 in relation to a case involving The Sunday Times against the former Irish prime minister Albert Reynolds. The defence protects unproven allegations from libel, even if they later turn out to be false, as long as they are in the public interest and journalists meet a number of standards of responsible journalism in reporting them.
However, the judge, Justice Eady, who tried the case without a jury, ruled against The Daily Telegraph because although its Westminster correspondent called Galloway before the story was written, the documents were not shown or read out to the MP and, therefore, he did not have a fair opportunity to make inquiries or comment upon them.
Justice Eady said he was "obliged to compensate Mr Galloway in respect of the publications and the aggravated features of the defendants' subsequent conduct, and to make an award for the purposes of restoring his reputation".
The Telegraph Group expressed its disappointment at the ruling, reiterating its belief that it published genuine documents, and said it would seek to appeal.
Neil Darbyshire, executive editor of the The Daily Telegraph, said: "We are naturally disappointed by this judgment, which we believe is a blow to the principle of freedom of expression in this country. We will be seeking leave to appeal from the Court of Appeal.
"The Daily Telegraph published genuine documents that emanated from the highest levels of the Iraqi government and raised questions about the activities of Mr Galloway, a British Member of Parliament."
Media law expert Jess McAree said that using the "Reynolds defence" was already hard, the latest ruling, he said, made it considerably harder.
"The Galloway articles bore all the hallmarks of careful handling by the in-house lawyer, and the Telegraph's case seemed strong. Galloway's victory means that the Reynolds defence, already a hard one to mount, just got a whole lot harder... and may even be dangerous."
Galloway has already received damages and a public apology from US newspaper The Christian Science Monitor in March 2003, over an article making similar claims that he accepted money from Saddam.
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