Lucy Wright admits she tried to smuggle almost 14lb (6.32kg) of cocaine out of Buenos Aires, and later skipped bail to avoid being put on trial in South America.
After she returned to England she was arrested and the Home Secretary, Theresa May, approved her extradition to Argentina, where she faced up to 16 years behind bars.
Due to give birth in May, the 28 year-old from Bolton, Lancs, was preparing to give up her newborn baby to her sister.
But in London's High Court on Tuesday, Sir John Thomas and Mr Justice Silber quashed an earlier judgment that Miss Wright should face trial abroad.
They said an expert called in her case had provided "powerful" evidence that, as a woman and a foreign prisoner, she would have to endure a lack of food and hygiene products, and would face humiliating strip-searches by prison staff as well as attacks from fellow inmates.
The judges said: "The uncontradicted evidence shows a disturbing pattern of cruel, inhuman treatment being suffered by female prisoners and especially foreign ones in Argentina.
"So it is very likely that the appellant would be subjected to this treatment in the absence of any adequate redress available to her."
They "stressed" that their decision was based on the specific facts of the case, and the failure of the Argentinean government either to provide reassurances about Miss Wright's treatment or to rebut the expert evidence.
"Therefore there is no basis whatsoever for assuming or believing that future attempts by the Government of Argentina to obtain extradition orders will fail for these reasons, which were found to be crucial on the evidence adduced and that were not challenged in the present case."
However the ruling risks worsening still further relations between London and Buenos Aires, already strained as the 30th anniversary of the Falklands war approaches.
Argentina has prevented cruise ships docking at its ports and threatened legal action against British companies exploring for oil and gas off the disputed islands in the south Atlantic, while the deployment of the Duke of Cambridge to the Falklands has been condemned as an act of "bravado" by Amado Boudou, Argentina's vice-president.
The High Court judgment also stands in contrast to the ease with which Britons have been extradited both to the USA and countries in Europe in recent months.
Miss Wright will now likely face trial on importation of drugs charges in an English court.
The judges said: "In the light of our decision on the extradition proceeding, the Crown Prosecution Service will be free to bring proceedings against the appellant… based on her free admissions."
Miss Wright has previously claimed that she was a nursing student in London when she became addicted to crack cocaine following the breakdown of a relationship and a bout of depression.
She told an interview that she was offered £10,000 by a drug dealer to bring cocaine into Britain from Peru, via Argentina.
The package was stored in her luggage when she started to have second thoughts Buenos Aires airport in March 2007, and then she "got tapped on the shoulder".
After one night in a local jail she was bailed and managed to reach Brazil, where she told the British Consulate she had lost her passport and was able to obtain a replacement and return home.
A CPS spokesman said: "We will consider the ruling handed down today by the High Court."
