Lawyer Maya Lester, who represented the ISYF, said: "The Home Secretary has the power to proscribe organisations that she considers to be 'concerned in terrorism', for example by participating in, preparing for, or promoting acts of terrorism.
"The ISYF was proscribed in March 2001, and lodged an application for de-proscription and an appeal to the Proscribed Organisations Appeal Commission (POAC) last year.
"The Home Secretary has now concluded that the statutory test is not met, and that there is insufficient information that the ISYF is currently concerned in terrorism and so their application should be granted." This is only the second time the Government has effectively unbanned a so-called terror group.
"And a former ISYF
leader was actually awarded the OBE at the same time as his group was being declared a terrorist organisation."
'If the Government had any misgivings about the ISYF, they should have informed me,' he said.
Sandwell-based ISYF has consistently dismissed claims that it is involved in terrorism and is being backed by several Midland MPs including Mr George.
Membership or support of any of the groups is a criminal offence, which forced the ISYF to disband last month.
As revealed in the Sunday Mercury last month, even Prime Minister Tony Blair met the President of the ISYF at a Birmingham function to celebrate the 300th anniversary of Sikhism.
Sukhvinder Singh, spokesman for the 200,000-member ISYF, said: 'The debate highlighted significant deficiencies in the banning process and we would like to thank all the MPs who supported us.
'Nonetheless the ISYF has decided that it has little choice but to suspend the organisation and all officers have resigned.
But the move may embarrass the government after a Sunday Mercury investigation discovered that several local MPs have regularly attended ISYF annual conferences in Wolverhampton.
And an exclusive picture shows Prime Minister Tony Blair being introduced to ISYF president Amrik Gill at a Birmingham conference organised by the fragmented group.