The 9th U.S. Circuit Court of Appeals instructed the lawyers for the gay rights group that brought the lawsuit challenging the policy to file arguments by Monday. The 1993 "don't ask, don't tell" rule says gays may serve but only if they keep secret their sexual orientation.
Government lawyers sought to suspend U.S. District Judge Virginia Phillips's ruling while appeals were pending, arguing that it would pose a major problem for the military. They said it could encourage service members to reveal their sexual orientation before the issue is fully decided.
President Barack Obama says he supports repeal of the policy, but only after careful review and an act of Congress.
A lawyer for the Log Cabin Republicans said the group was disappointed with the appeals court's action.
"We view the decision as nothing more than a minor setback," Dan Woods said. "We didn't come this far to quit now, and we expect that once the Ninth Circuit has received and considered full briefing on the government's application for a stay, it will deny that application."