The newspaper had accused Galloway of being in the pay of Iraqi dictator Saddam Hussein, and based its case on documents found by its foreign correspondent David Blair in Baghdad's foreign ministry shortly after the Iraq war in April 2003.
However, Lord Justice Tuckey yesterday decided one of the Telegraph's legal arguments was "worthy of consideration" and ordered an appeal to be heard by three senior judges.
It concerns the defence of qualified privilege, which protects unproven allegations from libel claims, 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.
Lord Justice Tuckey said that there was a gap between how English courts and the European Court of Human Rights allow the defence to be used.
He referenced recent cases at the European Court of Human rights where judges ruled that it was unfair for journalists to be expected to act with total objectivity when reporting allegations, which is in contrasts to the neutral reporting required by English courts.
Media law expert Jess McAree said: "The European Court of Human Rights is increasingly becoming a fallback for claimants and defendants. It seems that the Telegraph is trying to argue that its right to freedom of expression, enshrined in the Human Rights Act, has been denied."
In last year's trial, Justice Eady, who tried the case without a jury, ruled against the Telegraph because although its Westminster correspondent Andrew Sparrow 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. Moreover, the tone of the Telegraph's reporting was deemed to be overtly partisan. The qualified privilege defence demands that a newspaper maintain a neutral stance.
The development staves off the payment of the £150,000 damages and estimated £1m costs the Telegraph was ordered to compensate Galloway.
Galloway, who was a fierce critic of the war in Iraq, leading to his expulsion from the Labour party and launch of his far left Respect Party, hit the headlines yesterday as he called for Saddam's foreign minister Tariq Aziz to be freed from prison in Baghdad.
He appeared on Al Jazeera to back an international petition for Aziz's release and said: "Mr Tariq Aziz and thousands of political prisoners are still held illegally as hostages by the occupation authorities."
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