Campaigners for age equality today lost a key stage in their legal battle to banish the compulsory retirement age in the UK.

An Advocate-General at the European Court of Justice in Luxembourg rejected Age Concern's claim that compelling people to stop work at or after 65 without compensation breaches EU equality requirements.

Today's legal opinion is a blow to hundreds of people forced to retire against their wishes who are claiming compensation through UK employment tribunals.

About 260 cases are already on hold in tribunals, awaiting the outcome of the Age Concern test case, and thousands more claims could follow from pensioners forced to retire against their will.

But the Advocate-General has now argued that a fixed retirement age is not necessarily contrary to EU rules.

Lawyers for Age Concern told a hearing earlier this year that the UK Employment Equality (Age) Regulations breach the EU's Equal Treatment Directive, which bans employment discrimination on grounds of, amongst other things, age.

The UK Regulations, introduced in 2006, do ban discrimination on grounds of age, but excludes pensioners, who can be dismissed at 65 without redundancy payments, or at the employer's mandatory retirement age if it is above 65.

Government lawyers insisted the exception was a matter for national rules, and the situation of retirement age workers should not be governed by the EU Directive.

One of Age Concern's member organisations, Heyday, took the case to the High Court, which sent it to the EU court for a ruling.

In today's "opinion", the Advocate-General, Jan Marzak, agreed with Age Concern that UK rules on mandatory retirement are covered by the EU Directive.

But he made clear that discrimination on grounds of age could be justified in certain circumstances.

Allowing employers to force employees to retire aged 65 or over "can in principle be justified if that rule is objectively and reasonably justified in the context of national law by a legitimate aim relating to employment policy and the labour market, and it is not apparent that the means put in place to achieve that aim of public interest are inappropriate and unnecessary for the purpose".

Today's "opinion" is not legally binding, but is followed by the EU judges in about 80% of cases. The final verdict is due in about six months.

The Advocate-General also rejected Age Concern's claim that national governments should have to provide a specific list of which differences of treatment in retirement age are justified.

The current EU Directive provides an "illustrative" list, but to provide an exhaustive list would be impossible, the Advocate-General argued, concluding that current UK retirement legislation "is not incompatible (with EU rules) merely because it does not contain a specific list of permissible forms of treatment".

A victory for Age Concern - not ruled out but now unlikely - could trigger a major change in domestic employment law, and a flood of compensation actions in addition to the 260 now pending.

About 25,000 workers are estimated to face "default retirement" at 65 in the UK every year, when they would be happy and able to carry on.

At the time of the Age Concern hearing earlier this year, anti-discrimination campaigner in the European Parliament Liz Lynne, a UK Liberal Democrat MEP, commented: "I worked hard in the European Parliament to ensure that age was included in the original European Directive, which forced the Government to bring in workplace age discrimination legislation in the UK.

"Sadly, the Government's interpretation of the law has led to a contradictory situation whereby employers cannot discriminate on the basis of age, but as soon as an employee reaches 65 they can be sacked for no reason other than their age.

"The Government has said it will look at the situation in 2011 - this is far too late for the thousands of people who will want to stay in work in the meantime."

She added: "We must end the sudden cliff-edge of retirement that forces people to stop working at a certain age whether they want to or not, whilst ensuring that individuals still remain entitled to a state pension at an agreed statutory age."

We agree with the Advocate-General's opinion, which reflects a sensible and fair approach to this issue Katja Hall

The CBI's director of employment, Katja Hall, said the employers' body backed the Advocate-General's "sensible and fair" view.

"We agree with the Advocate-General's opinion, which reflects a sensible and fair approach to this issue.

"Companies value the skills and experience that older staff bring to the workplace and want to treat them well. The UK has one of the highest employment rates of older workers in Europe."

She went on: "Employees already have the right to request postponement of retirement, and this right is working well.

"Our surveys show that just over 30% of employees requested postponed retirement in the last year and over 80% of these requests were granted.

"This right ensures that employers and employees sit down and find solutions that work for both sides.

"Firms must retain the right to say no and retire people with dignity at the end of their career with the company.

"Losing the ability to retire people at 65 could lead to unintended consequences, with employers less inclined to take on older workers and forced to dismiss on grounds of poor performance an earlier stage."

The Institute of Directors also welcomed the Advocate-General's opinion, insisting there was no need to change a law which already allowed staff to continue after 65, subject to mutual agreement.

Alistair Tebbit, the IoD's head of EU and employment policy, said: "In an increasingly competitive environment no sensible employer wants to lose good staff just because they've reached a certain age.

"The current system, where an employee can request to work beyond the normal retirement age, works well already - employers are free to retain older staff, and employees can work beyond 65 where there is mutual agreement.

"There is no need for a change in the law and the IoD welcomes the court's decision."

A spokesman for the Department for Business, Enterprise and Regulatory Reform welcomed the Advocate-General's opinion and said the case will now have to be considered by the European Court of Justice and the High Court before a final decision is made.

The department said the so-called default retirement age was introduced following extensive public consultation and was used by employers to plan their workforce.

"Many choose not to use it and the Government does not set a mandatory retirement age.

"Our long-term aim is to move away from compulsory retirement, but a culture change is not possible overnight.

"Many employers already realise the value of recruiting, training and retaining older staff and introducing more flexible working practices.

"We are monitoring the default retirement age and are committed to reviewing its effectiveness in 2011. If evidence shows it is no longer necessary then we will remove it."

Anti-discrimination campaigner and Lib Dem MEP Ms Lynne described the opinion as "extremely disappointing".

She said: "This decision is certainly a setback on the road to ending age discrimination. However, it is important to remember that this is only the opinion of the Advocate-General, and is not binding on the judges who will make the final ruling.

"The Advocate-General himself said in his opinion that in a perfect world everyone would be judged individually and according to their merits. Unfortunately he shied away from moving towards this goal."

She added: "I hope that the European Court itself will not make the same mistake.

"I sincerely hope that the formal ruling of the court will put an end to the sudden cliff-edge of retirement that forces people to stop working at a certain age whether they want to or not.

"It is also vital that this formal decision comes soon: there are now over 260 employment tribunal cases in England and Wales awaiting a final ruling, while thousands of people continue to lose their jobs unfairly every year. This cannot be allowed to continue."

TUC general secretary Brendan Barber said: "The recommendation of the Advocate-General will be hugely disappointing for the many employees who want to or need to continue to work beyond retirement age.

"It makes no sense that we have laws in the UK that aim to remove age discrimination but include a get-out clause for employers who want to kick people out when they reach 65 regardless of whether or not they are doing their job well."

Catharine Pusey, director of the Employers Forum On Age, said: "Today's news leaves us no further forward on the issue of default retirement in the UK. It would be wrong for either side to claim a victory.

"The situation still hinges on whether the UK Government can objectively justify the inclusion of a default retirement age in the age discrimination legislation."

Help the Aged and The Age and Employment Network (TAEN) this afternoon urged EU judges to reverse today's opinion from the Advocate-General.

TAEN chief executive Chris Ball said: "The opinion may be a setback, but the judges are not bound to accept it. And if Gordon Brown wants to appeal to the sense of fairness of the British people this afternoon, he should announce an end to the stupidity of employers firing people who are fit and able to work, just because they have reached a certain birthday."

Kate Jopling, head of public affairs at Help the Aged, said: "This is a disappointing judgment, particularly for many older workers facing forced retirement, but also for the whole economy which continues to lose out on older people's skills and experience due to the flagrant ageism which runs through our society.

"Given the ageing demographics of our UK society and the current economic climate, older people should be able to choose to carry on working for as long as they are able.

"There is simply no justification for allowing a 65th birthday card to come hand in hand with a P45, regardless of competency or previous track record.

"We hope that, in the next stage, the European Court of Justice sees things differently - they must sweep away this wholly unjust anomaly in British law."

An employment lawyer said it was "far from certain" that the final verdict would back the continuation of a fixed retirement age in the UK.

Specialist discrimination barrister Paul Epstein QC, of Cloisters Chambers, London, commented: "The view which is being put forward here is that age discrimination is less serious than race or sex discrimination and the Government has largely got it right in terms of European law. Furthermore, it leaves the possibility for 'justifying' age discrimination in any case wide open.

"However, it is far from certain at this point whether this opinion will be followed by the European Court of Justice. There is clearly a jurisprudential fight within the Court on the nature of age discrimination.

"In a recent age discrimination case from Spain the Court did not follow the entire opinion of the Advocate General.

"Furthermore, the case now has to return to the High Court where the Government still has to win the main case and justify forcible retirement at 65 and over as a legitimate aim.

"The advice for employers at this point therefore remains the same - proceed with caution."

Marian Bloodworth, senior employment lawyer at Lovells, said employers needed certainty and today's opinion did nothing to help deal with workers imminently reaching the current UK retirement age: "In the current difficult economic climate, employers need a degree of certainty, and will not welcome the additional delay whilst they await the final outcome of the case.

"At the back of employers' minds will be the prospect of expensive and time consuming claims from the retired employees should the UK courts find in due course that the Government cannot justify the retirement age of 65. Employers may therefore feel more comfortable allowing employees to work beyond retirement age.

"Where the business can accommodate such a request, employees can be allowed to work for fixed periods of time (rather than for an open ended period), allowing for further review of the situation and the business' needs. This may in the circumstances be the least risky approach for businesses while we all await further clarification."