The judgement overturns a previous ruling by a tribunal in July that Islington Council had been wrong to threaten Lillian Ladele with dismissal over refusing to conduct civil partnership ceremonies for same-sex couples "as a matter of religious conscience".
The appeal tribunal upheld Islington council's appeal on Friday, stating,“The council were not taking disciplinary action against Ms Ladele for holding her religious beliefs; they did so because she was refusing to carry out civil partnership ceremonies and this involved discrimination on grounds of sexual orientation.
“The council were entitled to take the view that they were not willing to connive in that practice by relieving Ms Ladele of these duties, notwithstanding that her refusal was the result of her strong and genuinely held Christian beliefs.
“The council were entitled to take the view that this would be inconsistent with their strong commitment to the principles of non-discrimination and would send the wrong message to staff and service users.
The tribunal also found, however, that Ms Ladele's religious beliefs had not been treated sensitively by members of staff on Islington council.
“There were clearly some unsatisfactory features about the way the council handled this matter. The claimant’s beliefs were strong and genuine and not all of management treated them with the sensitivity which they might have done," it stated.
Ms Ladele's solicitor Mark Jones said she intended to appeal the decision.
Mr Jones said in a statement outside court, "She wants to make it clear that, whatever other commentators may have said, this case has never been an attempt to undermine the rights of members of the lesbian, gay, bisexual or transgender communities.
"The evidence showed that Lillian performed all of her duties to the same high standard for the lesbian, gay, bisexual or transgender communities, as she did for everyone.
"This case has been about the shortfall between the principle of equal dignity and respect for different lifestyles and world views, and Islington council's treatment of Lillian Ladele - conduct which the tribunal felt moved to describe as extraordinary and unreasonable."
Ms Ladele's case was financed by the Christian Institute's Legal Defence Fund. Colin Hart, its director, said: “Gay rights are not the only rights.
"If this decision is allowed to stand it will help squeeze out Christians from the public sphere because of their religious beliefs on ethical issues.”
