The decision came amid assertions prison authorities were simply trying to cover up the horrific treatment meted out to Ashley Smith that was captured on video.
In a ruling that took about an hour to decide, Divisional Court Justice Joan Lax dismissed the stay motion.
Correctional Service Canada asked for the emergency halt to the much-delayed inquest to give it time to get the courts to review a ruling by the presiding coroner that the videos should be public.
The videos at issue show, among other things, guards duct-taping Smith to an airplane seat, and forcibly injecting her with "chemical restraints" against her will.
Lawyer Julian Falconer, who speaks for Smith's family, accused the government of trying to put a lid on videos that document some of the abuse she suffered.
"I insist on Correctional Services being called an abuser," Falconer told Lax.
Falconer called the images "central" to understanding Smith's state of mind.
"This case is really about Correctional Service Canada taking all conceivable steps so that certain videos don't make it to the public record," he said.
Smith's family — with backing from presiding coroner Dr. John Carlisle — wants to use the tapes in support of a broader inquest that includes how she was treated in prisons outside Ontario.
In arguing the stay, Correctional Service said the videos have not yet been put into evidence and so should stay out of the public eye until such time as that happens to avoid any tainting of the jury pool.
Corrections lawyer Joel Robichaud also said lawyers had undertaken not to release the materials, and doing so could jeopardize future co-operation between the department and coroners.
Carlisle is expected to announce Thursday that the inquest will resume on Oct. 31.
Earlier in the day, Carlisle reluctantly adjourned the inquest pending the outcome of the emergency stay motion.
The lawyers — about 20 of them — then rushed down the several blocks to divisional court.
Lax initially appeared puzzled as to how she could decide the motion without proper documentation — an indication of the last-ditch government scrambling.
"I don't have anything," Lax said, fingering the few pieces of paper before her.
"What do counsel suggest I do? I don't have a lot of information here."
Five years ago, as guards looked on, Smith, 19, of Moncton, N.B., choked to death in her cell in Kitchener, Ont., after repeated episodes of self-harm.
She spent her final year in solitary confinement, shunted 17 times among nine different prisons in five provinces with little treatment for her mental illness.
The video issue came to the fore because a handful of doctors — backed by Correctional Service — are challenging the scope of the inquest, arguing Carlisle has no jurisdiction outside the province.
The arguments on focus were to begin on Tuesday, but the government held up proceedings as it sought suppression of the footage even though Ontario's highest court had previously ruled a video showing Smith dying could be aired publicly.
Carlisle rejected the request and ordered the hearing to proceed, with the expectation the videos would be screened.
"I can do no better than adopt his reasons," Lax said in her decision.
The lawyers, who had arrived at coroner's court Wednesday morning expecting to make substantive arguments on the scope of the inquest, were furious at the government's tactics.
"What is happening today is essentially bullying," said Allison Thornton, lawyer for the Canadian Civil Liberties Association.
The last-minute moves "border on contempt," fumed Richard Macklin, lawyer for Ontario's child advocate.
Vic Toews, public safety minister, had little to say about his department's tactics.
"We expect the coroner's inquest will examine the facts and close the book on what has been a tragic incident," Julie Carmichael, his spokeswoman said.
"We express our condolences to the family of Ms. Smith."
Don Head, the Correctional Service commissioner, who has called Smith's duct-taping a "major problem" but has not been available to comment, is expected to be called as a witness.
An inquest jury was scheduled to start hearing evidence Jan. 14, 2013 and Carlisle deplored any delay, saying the inquest was "designed to save lives."
A report this week showed that the number of inmates hurting themselves in Canadian prisons has almost tripled in the last five years, with women disproportionately represented.