Regulatory body Environmental Protection Agency (EPA) had added a rule to the existing Clean Air Act in 1990 that prevented authorities from adding to monitoring requirements.
In a ruling on Tuesday, the U.S. Court of Appeals for the District of Columbia Circuit noted that sometimes existing monitoring requirements do not assure compliance.
"We vacate this rule because it is contrary to the statutory directive that each permit must include adequate monitoring requirements," the court said in the ruling.
Industry body American Petroleum Institute, which is represented by companies like Exxon Mobil Corp and Chevron Corp, was a party to the case supporting the EPA.
The EPA was not immediately available for comment.
This is the second setback for the Bush administration's centralized control over polluting emissions reduction in just over a month.
In July, the same court had rejected the EPA's plan on reducing polluting emissions from power plants and help states meet federal clear air standards.
The court had ruled that the EPA went beyond its authority to create the Clean Air Interstate Rule, known as CAIR, which used a trading scheme among utilities to reduce emissions of sulfur dioxide and nitrogen oxides at power plants in 28 located in the East and Midwest.
(Reporting by Saumyadeb Chakrabarty in Bangalore; Editing by Louise Ireland)