The Trump administration argued, unsuccessfully, that the appeals court must defer to Trump's stated reason for issuing the order - national security - under the Supreme Court's 1972 decision in Kleindienst v. Mandel.
"Immigration, even for the president, is not a one-person show", the judges said, adding: "National security is not a "talismanic incantation" that, once invoked, can support any and all exercise of executive power".
The state says the policy is unconstitutional because it shows anti-Muslim bias.
This is the second time the Ninth Circuit Court of Appeals has ruled against Trump's travel ban, which targets nationals from six majority-Muslim countries. United States, which upheld the internment of Japanese-Americans during World War II, to highlight the danger of classification by nationality.
Neal Katyal, an attorney for the state of Hawaii which is challenging the ban, also mentioned Twitter.
The ruling from a unanimous three-judge panel of the 9th US Circuit Court of Appeals deals the administration another legal defeat as the Supreme Court considers a separate case on the issue.
Question: About how long will it take for the U.S. Supreme Court to decide on this matter?
Trump has been on the losing side in all four court rulings on the March order.
When he was out on the campaign trail a year ago, candidate Donald Trump promised to appoint conservative U.S. Supreme Court justices who'd adhere to a strict reading of the U.S. Constitution and return law-and-order to the land.
Spicer said the country needs every available tool at its disposal to prevent terrorists from entering the USA and committing acts of bloodshed and violence.
The 9th Circuit upheld the block on Trump's three-month travel ban for the six countries and four-month suspension of all refugee admissions.
The court did limit the scope of Watson's ruling in one respect: inter-agency review of foreign countries' vetting procedures. The court said he was required to consult with Congress in setting the number of refugees allowed into the country in a given year and that he could not decrease it midyear.
Trump's Muslim ban order, it is also worth noting, only purports to be a 90-day travel ban.
The court cited shortcomings with the order as it now is, saying the order does not tie people within the six designated countries in any way to terrorist organizations.
Trump's suspension of the US refugee program also remains blocked.
The revised ban already had been blocked by federal district court judges in Hawaii and Maryland and by the U.S. Court of Appeals for the 4th Circuit, based in Virginia. In a footnote, they said they "need not address" claims of religious discrimination to rule on the injunction.
Trump during the 2016 presidential campaign called for a "total and complete shutdown of Muslims entering the United States".
Monday was the deadline for the ban's challengers to respond to the administration's request that the order be allowed to go into effect.
However, on the decision from the Fourth Circuit, they ruled essentially that the rhetoric which Trump used during the campaign was that he wanted to ban Muslims.
The president's order did not tie citizens of Iran, Libya, Somalia, Sudan, Syria and Yemen to terrorist organizations or contributors to "active conflict", the court said.
Trump's earlier January 27 order also included Iraq among the countries targeted and a total ban on refugees from Syria.
In March, Trump issued a narrower order, but federal courts that have examined it so far have blocked it as well. The lower court blocked the administration from enforcing the order entirely, on the grounds that it violates the First Amendment's prohibition on government establishment of religion.