Two federal judges had earlier blocked its implementation, at least in part, although the Supreme Court this month allowed it to fully take effect while the legal battle ran its course through the courts.
A decision by the three-judge panel of the US Court of Appeals for the District of Columbia is the latest court decision to go against the White House, meaning the issue may end up before the Supreme Court.
The administration has appealed against all three rulings.
The court said that under the Immigration and Nationality Act, Trump could only ban immigrants based on nationality if he makes a "finding" that the entry of those individuals would be "detrimental to the interests of the United States".
Trump's latest travel ban, signed in September, forbids US entry for travelers from Chad, Somalia, Iran, Libya, Syria, Yemen and North Korea. Trump, a Republican, has said the travel ban is needed to protect the United States from terrorism.
"It is axiomatic that the President must exercise his executive powers lawfully", the 9th Circuit panel wrote.
"I have always believed that the rule of law, reinforced by Hawaii's values, will win the day", Hawaii Attorney General Doug Chin said in a statement Friday.
Since taking office in January, Trump has been struggling to enact a ban that passes court muster.
"This ruling again confirms that the president has gone far beyond the immigration powers that he has, and has ignored the law in issuing this discriminatory order".
Friday's ruling marks another victory for states, advocacy groups, technology companies and universities that successfully challenged the first executive order and its replacement as being at odds with nation's founding principles and hurting the economy.
The latest version blocks travelers from the listed countries to varying degrees, allowing for students from some of the countries while blocking other business travelers and tourists, and allowing for admissions on a case-by-case basis. The curbs were also extended to cover senior officials from Venezuela and their families.
Apple Admits It Slows Down Older Phones
Without algorithms in place to slow down the processor, Apple warned that older iPhones would frequently shut down. Apple isn't trying to force you to buy a new phone, but rather get more life out of the one you already have.
Indiana's Unemployment Rate Dropping
The month of November saw very little change in the Norfolk-area's job numbers. Hawaii reported the lowest seasonally adjusted unemployment rate at 2 percent.
Celebrities Who Suffer With Chronic Diseases
Now if that isn’t the epitome of what a BFF is, I don’t know what is! Selena continues to be on chronic medication. There is also a huge list of celebrities past like famous painter vincent Van Gogh who suffered with this disease.