A coastal waters protection agency illegally issued a licence for dumping thousands of tonnes of silt off Cornwall.
The Marine Management Organisation (MMO) has agreed to quash the licence and admitted it was "made unlawfully".
It said at London's High Court that there were "inadequacies" in the way it took the decision to issue the licence.
Campaigners fear dumping silt from Devonport docks in Plymouth at Whitsand Bay could affect protected species.
The MMO issued a licence in March 2014 to dump 370,000 tonnes of silt about 800m from a Marine Conservation Zone (MCZ) at Whitsand Bay.
Campaigners said in a judicial review that the Marine Management Organisation (MMO) did not consider the protection of sensitive habitats.
It follows a long-running dispute between the MMO and environmental campaigners who say toxic materials from the navy yard is smothering reefs and killing rare pink sea fans in the MCZ.
The organisation must now issue a new licence, but it is unclear if another will be granted so close to the conservation zone.
Marine consultant Terri Portman, of Stop Dumping in Whitsand Bay, said: "We have nothing against dredging, but in this day and age we know better than to simply use the marine environment as a rubbish bin.
"The ruling is a huge step forward so the regulator thinks seriously about dumping.
"It is just not good enough to continue dumping in Whitsand Bay."
The MMO confirmed it had told solicitors for the campaigners that the licence would be quashed.
It said: "The judicial review proceedings are still very much ongoing and as such we cannot comment further on the case at this time."
The Royal Navy said dredging was essential to give ships access to the yard.
Dredging firm Westminster Boskalis has not yet commented.