Thailand's courts, like its military, are seen as bastions of anti-Thaksin conservatism, and have a record of hostile rulings toward Thaksin's political machine, which is fueled by billions of dollars that he made as a telecommunications tycoon.
Analysts said Wednesday's ruling further sullied the courts' reputation.
"The credibility of the justice system has vaporized," said Thongchai Winichakul, a professor of Southeast Asian history at the University of Wisconsin. "The royalist conservatives may celebrate this judicial coup. But the world will mourn over the death of another democracy."
Yingluck is despised by Bangkok's elite and middle class as a puppet of her brother. But she and her Pheu Thai party remain highly popular among the country's poor majority, particularly in the north and northeast.
Her opponents have been demanding that she step down to make way for an interim unelected government that would remove her family's influence from politics.
Thaksin's supporters say the Thai establishment opposes him because their position of privilege has been threatened by his electoral popularity, cemented by populist programs that benefited the less well-off in the countryside.
Wednesday's ruling casts doubts on whether new elections planned for July will be held, following polls in February that were disrupted by the protesters and then invalidated by the court.
In 2007, the Constitutional Court made a landmark ruling dissolving Thaksin's original Thai Rak Thai party for fraud in a 2006 election, and banned its executives from politics for five years. Thaksin went into self-imposed exile in 2008 to escape a two-year jail sentence for conflict of interest while prime minister.
Thaksin's allies in late 2007 handily won the first post-coup election, but the Constitutional Court in 2008 kicked out two successive pro-Thaksin prime ministers in rulings on controversial legal grounds.
A coalition government then cobbled together by the opposition Democrat Party had to use the army to put down pro-Thaksin demonstrations in 2010 that left more than 90 people dead in street battles, but Yingluck and her Pheu Thai party won a sweeping majority in a mid-2011 general election.
Opposition senators lodged Wednesday's case with the Constitutional Court over the transfer of National Security Council chief Thawil Pliensri. He was replaced by the national police chief, who in turn was replaced by a Thaksin relative.
"Transferring government officials must be done in accordance with moral principle," the court said in its ruling, read aloud on live television for almost 90 minutes. "Transferring with a hidden agenda is not acceptable."
Yingluck's fortunes plunged late last year when her party used shady legislative tactics to try to ram through a law that would have given an amnesty to political offenders of the previous eight years, including Thaksin. The move ignited mass anti-government demonstrations.
Seeking to ease the pressure, Yingluck in December dissolved the lower house and called elections for Feb. 2. But her opponents on the street disrupted the polls.
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Associated Press writers Grant Peck and Jocelyn Gecker contributed to this report.
