In a victory for environmentalists and a setback for big U.S. coal-burning utilities, a federal court ruled on Friday that the Environmental Protection Agency must fundamentally rework its mercury rules for utilities.

The U.S. Court of Appeals for the District of Columbia ruled that the EPA violated the Clean Air Act in 2005 when it exempted coal plants from the strictest emission controls for mercury and other toxic substances like arsenic, lead and nickel.

The EPA's "Clean Air Mercury Rule" would have created a "cap-and-trade" program to allow utilities to swap rights to emit mercury to comply with overall limits that would reduce nationwide emissions by 70 percent by 2018.

Some 14 states, including New York and California, sued the EPA over the rules, along with environmental and public health groups.

The court ruling means that big coal-burning utilities like Atlanta-based Southern Co and American Electric Power of Columbus, Ohio, will have to install expensive mercury-reduction equipment at more of their power plants rather than rely on a fleet-wide trading program.

The ruling adds to the U.S. backlash against building coal-fired power plants, which are also a major source of heat-trapping carbon dioxide emissions.

Wall Street banks including Citigroup Inc, JP Morgan Chase & Co and Morgan Stanley this week issued standards that weigh carbon dioxide and mercury emissions when determining whether to lend money for new power plants.

"This adds to the momentum against building new coal-fired power plants," said John Walke, attorney with the Natural Resources Defense Council, which participated in the lawsuit. "This immediately changes the landscape and adds to the argument against new pulverized coal plants."