The ruling by the Asylum and Immigration Tribunal means the head of the Freedom Party, who is accused of Islamophobia, could now be allowed into the country.
He was due to show his short film Fitna, which criticises the Koran as a ''fascist book'', at the House of Lords in February.
But Ms Smith said his presence had the potential to ''threaten community harmony and therefore public safety''.
A Home Office spokesman said the Government was ''disappointed'' by the ruling.
He said: ''We are disappointed by the court's decision today. The Government opposes extremism is all its forms.
''The decision to refuse Wilders admission was taken on the basis that his presence could have inflamed tensions between our communities and have led to inter-faith violence. We still maintain this view.''
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