The decision, handed down Monday, is a victory for Mayor Richard M. Daley who backed the city's $433 million lawsuit against the gun industry filed in November 1998.
The Illinois Appellate Court said handgun manufacturers can be held liable for the crime and threat to public safety caused by its products.
The decision said: "In our view the plaintiff's complaint sufficiently pleads facts that, notwithstanding actual knowledge that the guns would be brought into Chicago and used in crimes, the manufacturers failed to alter their actions, thereby creating a public nuisance."
The lawsuit claimed gun manufacturers used a few suburban gun shops to flood Chicago with handguns that were illegally resold by traffickers to criminals.
An attorney for the gun industry said the manufacturers would file an appeal to the Illinois Supreme Court.
A spokesman for the Illinois State Rifle Association called the ruling "ludicrous."
City lawyers applauded the decision.
"The court ruled today that if you market guns like an ostrich, ignoring the fact that people coming in are clearly gang gun runners, clearly want them for illegal purposes, you are going to be held liable and the courts are going to require you to reform your marketing practices," Deputy Corporation Council Lawrence Rosenthal told the Chicago Tribune.
The ruling allows city attorneys to return to trial court to pursue a suit against 22 gun makers and distributors. Some 21 municipalities have filed lawsuits against the gun industry and 10 have been dismissed.