Deputy Secretary for the Civil Service Christopher Jackson said: 'We need to examine our arrangement very carefully indeed.

'We need to examine the criteria we used for allowing agreement [contract] officers to transfer, and to apply those equally and fairly.' The policy imposing a ban on overseas staff transferring to permanent terms was introduced in March 1985.

Expatriate contract officers already in service on that date were allowed, in limited circumstances, to transfer. Since June 1992, they have not been allowed to do even that.

Mr Jackson said: 'It is the across-the-board nature of this that is unlawful.' He said staff would be consulted in working out better arrangements.

The move was described as 'understandable' by the president of the Senior Non-Expatriate Officers' Association, Hui Kwok-hung.

He estimated that at most 2,000 local officers would be affected.

Because officers who wanted a transfer were required to apply a year before their contracts expired, the impact would not be significant.

But the president of the Association of Expatriate Civil Servants, Royston Griffey, who was involved in the court case, criticised the freeze as 'hypocritical'.

'The majority of the local officers have already transferred - after encouragement,' he said.

Mr Justice Keith also ruled that the policy of requiring overseas officers to undergo Chinese-language training when they wanted a transfer was unlawful, as was the insistence that overseas officers can be paid education subsidies only if their children go to school in Britain.

A government proposal on common terms of appointments and service conditions, awaiting discussion with the Chinese side, suggests scrapping education allowances.