The Yukon Supreme Court ruled the government did not respect the land-use planning process when it shifted the balance of protected land from 80 per cent to 29 per cent.
The green groups also hailed the decision by Justice Ron Veale, who said the changes don't enhance the goal of reconciliation with First Nations and are inconsistent with the honour and integrity of the Crown.
Veale quashed the government's adopted land-use plan, ordered the process back to the point where the error started and said more consultations must be held with First Nations and other affected communities.
The Na-Cho Nyak Dun and Tr'ondek Hwech'in First Nations, the Yukon chapter of the Canadian Parks and Wilderness Society and the Yukon Conservation Society took the territory to court after it approved the modified plan in January following seven years of research and consultations by a commission that recommended most of the watershed be protected.
"The Peel River watershed is as sacred to our people as it was to our ancestors, and through this decision today we have ensured it will remain so for our grandchildren," Chief Roberta Joseph of the Tr'ondek Hwech'in said in a statement.
Chief Ed Champion of the Na-Cho Nyak Dun said the court has honoured and upheld the integrity of the Umbrella Final Agreement, the blueprint for finalizing land-claim deals with First Nations in the Yukon for the last 21 years.
The First Nations' lawyer, Thomas Berger, had argued that the changes threw the entire planning process off track for the Peel, a 68,000-square kilometre region located at the end of the Rocky and Mackenzie Mountain chains.
"This is a remarkable judgment," he said Tuesday. "The land-use planning process in the Umbrella Final Agreement signed by Canada, Yukon First Nations and the Yukon government in 1993, and entrenched in the constitution, has been vindicated."
In striking down the government's land-use plan, Veale also said the territory did not provide enough details about its proposed modifications.
Critics have said that in adopting a land-to use plan that differed so drastically from the one put forward by the commission in February 2011, the government ignored the aims of meaningful dialogue and reconciliation inherent in the territory's land-claim agreements.
The Yukon government said Tuesday that it will carefully review the decision before determining how to move forward as it assesses implications of the judgment on land-use planning and the economic future in Yukon.
"As we examine the court’s opinion and the reasons given by the judge, we will continue to work with First Nations, consulting and engaging on many ongoing files, projects and activities," it said in a statement.
The Yukon government remains committed to upholding the final agreements related to negotiations with First Nations, it said.
The Opposition NDP said the ruling emphasized the government's neglect of its responsibilities under the Final Agreements.
"It's time for Premier (Darrell) Pasloski to admit that he was wrong to impose unilateral changes to the Peel land-use plan and respect the spirit and intent of the final agreements with First Nation governments," said NDP Leader Liz Hanson.
"Today's ruling is a testament to the importance of building, not sidestepping, government-to-government relationships," she said. "Instead of seeking leave to appeal this decision to the Supreme Court, the premier should seize this opportunity for reconciliation with First Nation governments."
Government lawyer John Hunter had argued in court that the agreement used for aboriginal land-claims settlements in the Yukon is clear in dictating that the government can ultimately approve, reject or modify a final recommended plan put forward by the Peel River watershed planning commission.
The Peel region came to public attention about a decade ago, when environmental groups joined with First Nations to advocate for its protection.
The watershed, which is about the size of Scotland, has a drainage basin fed by numerous rivers.
In July 2011, the commission put forward its final land-use plan and recommendations.