The prospect of an independent public inquiry into the case of Baha Mousa, an Iraqi hotel receptionist who died in British military custody, was raised last night after a panel of Law Lords ruled that human rights legislation did apply to his case.

Civil rights campaigners hailed the ruling as a landmark judgment. "There could now never be a British Guantanamo," said Shami Chakrabati, director of Liberty. "The British will never be able to build a prison anywhere in the world and say it is a legal black hole," she added.

However, the Law Lords also ruled against five other Iraqi civilians, who were shot in the streets of Basra. They rejected appeals by the families, on the grounds the deceased were not covered by the same human rights laws because the military was not "in effective control" of the circumstances and so was not in a position to discharge obligations under the human rights laws.

Mr Mousa, 26, died while in the custody of the British Army in Basra in 2003. It was alleged he was tortured over a period of 36 hours. He was found to have 93 separate injuries, including fractured ribs and a broken nose. In March, a court martial convicted one soldier of inhumane treatment but acquitted five others charged in the case.

Last night, the dead man's father, Colonel Daoud Mousa, said he was "very pleased" with the ruling: "It means I have not lost hope of getting justice for my son. I hope, as a result of this judgment, the truth will come out. No other family should have to experience what I and my grandchildren have gone through."

Phil Shiner, a lawyer representing Col Mousa, said the ruling was "a massive breakthrough in my client's efforts to secure accountability for deaths and torture in detention". He said it was now imperative to have an independent public inquiry to ascertain "who knew or ought to have known the banned techniques of hooding had been reintroduced".

However, Des Browne, Defence Secretary, stressed the Law Lords had "certainly not directed there should be a public inquiry"; this issue was a matter for the High Court. He said the ruling provided "helpful clarification" regarding the precise legal framework which applied to British forces operating abroad.

"As the Chief of General Staff has already said, Baha Mousa died after being held in UK custody and was subject to an unlawful conditioning process. We have never argued the treatment of Baha Mousa was acceptable or that his death should not have been investigated," Mr Browne said.

Lawyers acting for Mr Mousa suggested the ruling would affect the cases of nine other Iraqi civilians who were detained by British forces in Basra in September 2003.

The government had taken the Mousa case to the House of Lords to appeal against an earlier ruling that it was indeed covered by the Human Rights Act. The relatives of the others were appealing against the finding that UK human rights laws did not apply in their cases. The five Iraqi men, aged between 23 and 45, were all shot by British troops while on patrol between August and November 2003; three in the street, one in a house and one while driving a bus.

Baroness Hale, referring to Mr Mousa's case, said in the Law Lords' judgment: "It would be consistent with the purpose of the act to give his father a remedy against the Army in the courts of this country."

She agreed there was nothing in European law that meant the other five Iraqis were within British jurisdiction when they were killed.

Meanwhile, corrupt Iraqi officials are pocketing the pay of thousands of "ghost" policemen and soldiers who exist only on paper, a senior US officer claimed yesterday.

Lieutenant-General Martin Dempsey, who until recently headed coalition military training teams in Iraq, said the payroll scam went as high as the governors of the Shi'ite holy cities of Karbala and Najaf.

The general estimated up to 20% of the declared security force manpower in the two cities were part of the "ghost army" providing senior officials with a second income or retirement nest-egg.

But it also meant, when Iraqi units were mobilised for active duty, average turnout was 50% of their declared strength.

"Iraqi army rolls are also inflated by soldiers who have been severely wounded but are still being paid because the government lacks funds and a system for retiring them on a pension," General Dempsey added. "Units which showed up in Baghdad at half strength for 90-day rotations left US officers angered by the poor turnout."