The European Court of Human Rights has found that freedom of expression was not properly protected under Irish court procedure in the case of a €1.2m award to public relations consultant Monica Leech.
In 2009, Ms Leech won a libel action against Independent Newspapers in which she sued them for damages over a series of Evening Herald articles in 2004.
Ms Leech was initially awarded €1.87m but the amount was reduced to €1.2m following an appeal in the Supreme Court.
Independent Newspapers complained to the European Court of Human Rights that the award was excessive and had violated its right to freedom of expression.
The court said: "Unreasonably high damages for defamation claims can have a chilling effect on freedom of expression, and therefore there must be adequate domestic safeguards so as to avoid disproportionate awards being granted."
The court found that the safeguards had not proved effective in the case.
In a statement, the Group Editor-in Chief of Independent News and Media has welcomed the judgment.
Stephen Rae said: "Inordinate damages awards in libel cases can have a negative effect on freedom of expression in a democracy. The ECHR ruling is further proof that the Government needs to pay the issue serious attention.
"We call on the Government to take the European Court of Human Rights decision fully on board in its review of the Defamation Act."
The Press Council of Ireland also welcomed the ruling. It said that the level of damages awarded to Ms Leech represented a "violation of freedom of expression".
It said: "When people are defamed they are entitled to court awards to compensate for their wrongful loss of reputation.
"But if the award is so large that publishers run the risk of going out of business there is a real risk that democracy will suffer through the suppression of the means of communicating facts and opinions."