The High Court has ruled that the State is in breach of Article 8 of the European Convention on Human Rights.
Delivering a landmark judgment in the case of Lydia Foy, Mr Justice Liam McKechnie said he would be making a declaration of the breach, which must be laid before the Houses of the Oireachtas.
Dr Foy, who is 59 years of age, underwent gender realignment surgery 15 years ago and has been seeking the right to alter her name and sex on her birth certificate.
Mr Justice McKechnie said the declaration of incompatibility must be laid before the Oireachtas within 21 days.
He said those who suffer from gender identity disorder suffer from an incurable condition, saying Lydia Foy's former wife has lost a husband and her children had lost a father.
Justice McKechnie said it was clear that this case had wider implications than for Lydia Foy herself, stressing that there seemed to be a burning desire for applicants to have their sex recognised not only socially but also legally.
He said such a process is often humiliating and sometimes unsuccessful but he said everyone had the right to dignity.
Lydia Foy brought her case after undergoing a sex change operation. She wants a new birth certificate recognising that she is a woman.
Ms Foy has been engaged in a ten-year legal battle to obtain the new birth certificate, describing her as female.
Speaking outside the court, Ms Foy said she was confident the Government would act quickly on amending legislation.
Ms Foy said she was happy with the outcome and described it as recognition for people in a similar situation to her.
Gender Identity Disorder
Donal Foy had a condition known as Gender Identity Disorder and was registered at birth as male, later marrying and fathering two children.
After separating from his wife in 1991 he had gender reassignment surgery in 1992 to become a woman, and took the name Lydia.
Lydia Foy began legal proceedings against the Registrar of Births in April 1997, after her application to be described as female on her birth certificate was refused.
Her case was rejected by the High Court, but two days later the European Court of Human Rights ruled that the UK, in a separate case, was in breach of the European Convention on Human Rights by refusing to allow trans-gender people to get new birth certificates.
The Convention came into effect here in 2004.
Lydia Foy's case was sent back to the High Court, which heard she is not seeking to have her original entry in the Registry of Births changed.
She wanted a new birth certificate recognising her as female, something now permitted in most other EU countries.
If this could not be granted under Irish law, Dr Foy sought a declaration that the law is incompatible with the European Convention.
This is the first declaration that Irish law is incompatible with the European Convention on Human Rights since the convention was incorporated into Irish law on 31 December 2003.