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The European court of human rights has ruled "arbitrary and unlawful" the operation of indeterminate sentences for the protection of the public (IPPs), currently being served by more than 6,000 prisoners in England and Wales.

The Strasbourg judges said the prison system was "swamped" by prisoners without fixed release dates after the indeterminate sentences were introduced in 2005. They said the three inmates who brought the case had "no realistic chance" of accessing the rehabilitation courses they need to qualify for release.

The new justice secretary, Chris Grayling, told MPs he was disappointed by the judgment, and intended to appeal against it. He said: "It is not an area where I welcome the court seeking to make rulings."

The unanimous ruling by seven judges, including the British judge Sir Nicolas Bratza, awarded up to €8,000 (£6,500) compensation to three prisoners, Brett James, Nicholas Wells and Jeffrey Lee, who have been held up to two years and 10 months longer than the original minimum recommendation of their trial judge. They were also awarded €12,000 costs each.

All three were given indeterminate sentences after being convicted of violent offences in 2005 and ordered to serve a minimum tariff of two years, 12 months and nine months respectively. James, from Wakefield, has now been released, as has Lee, who lives in Fleetwood. Wells is still in prison.

Indeterminate sentences were introduced on the understanding that rehabilitative treatment would be made available to those prisoners concerned.

But the ruling published on Tuesday said the court found the "considerable delays in the applicants making any progress in their sentences had been the result of lack of resources, planning and realistic consideration of the impact of the sentencing scheme introduced in 2005".

The European judges note that the problems with IPP prisoners were the subject of "universal criticism" in the British courts. The ruling said the three inmates had been left in privately run local prisons for two and half years, where there had been few, if any, rehabilitation programmes.

"The stark consequence of the failure to make available the necessary resources was that the applicants had no realistic chance of making objective progress towards a real reduction or elimination of the risk they posed by the time their tariff periods expired," says the ruling.

"Moreover, once the applicants' tariff had expired, their detention had been justified solely on the grounds of the risk they had posed to the public and the need for access to rehabilitative treatment at that stage became all the more pressing".

The judges said that in those circumstances their detention had been "arbitrary and therefore unlawful".

The IPP sentence is due to be replaced by a new "extended determinate sentence" later this year. It will not apply to the IPP prisoners in jails in England and Wales, whose release dates are to be decided on a "case-by-case" basis by the Parole Board.

The Ministry of Justice, which has three months to consider whether to appeal, said the ruling did not mean that the 6,078 prisoners would now have to be released.

It said 3,531 IPP prisoners had passed their tariffs – the dates set by their trial judge for their earliest release. Officials added no compensation would be paid to the offenders who had brought the case until all appeals had been exhausted.

"We are disappointed by this judgment and are currently considering our grounds to appeal," the ministry said in a statement. "Public protection will not be put at risk – the judgment does not find that indeterminate sentences are unlawful, and will not mean prisoners currently serving IPP sentences will have to be released."

The justice ministry confirmed ministers' intention to replace the current complex IPP system with a new regime of determinate sentences: "This will see more dangerous criminals given life sentences, and others spending longer periods in prison, with tough licence conditions on release."

The prison system is understood to have recently improved IPP inmates' access to rehabilitation courses with better sentence planning and prioritised places on courses. One option facing Grayling, would be to implement a lower threshold release test, which was put on the statute book by his predecessor, Kenneth Clarke, for the parole board to use in IPP cases.

Frances Crook of the Howard League for penal reform said: "This judgment emphasises that the government was right to abolish the IPP in recent legislation as the sentence was fundamentally unjust.

"The question now is what can be done to give those IPP prisoners who are still in prison over their tariff the support they require in order to be safely released into the community.The Howard League and many others said for years that the IPP sentence was both wrong in principle and wrong in practice. It is wrong to imprison someone not for what they have done but what they might do. In practice, the IPP has proved a disaster that has left many in a catch-22 situation where they can only be released from prison after completing courses that our overcrowded prisons cannot provide, not least because there are now over 6,000 prisoners serving IPP sentences."