But the judges did cut half the AKP's treasury funding for this year.

The AKP, which won a huge poll victory last year, denies it wants to create an Islamist state by stealth. It called the case an attack on democracy.

The powerful military sees itself as the guardian of the modern secular state founded by Mustafa Kemal Ataturk.

Court president Hasim Kilic said the financial sanctions imposed on the AKP were a "serious warning".

Narrow decision

MP Suat Kiniklioglu speaks of the AK Party's relief at the court's decision.. click to listen

The court case followed a series of confrontations between the AKP, which has Islamist roots, and the secular elite. Turkish secularists have staged huge anti-AKP rallies.

The party's attempt to allow Islamic headscarves to be worn at universities was highly controversial.

Last month the constitutional court said the move to lift the existing headscarf ban violated the secular constitution.

Since the 1960s, more than 20 parties - mostly pro-Islamist or pro-Kurdish - have been shut down by the courts for allegedly posing a threat to Turkey's secularist principles.

However, this is the first time that a closure case has been brought against a governing party with a huge parliamentary majority.

EU officials expressed some relief at the court's ruling on Wednesday.

"It is positive. Turkey is living a tense situation and we very much hope that the decision by the court will contribute to restore political stability," said Cristina Gallach, spokeswoman for EU foreign policy chief Javier Solana, quoted by Reuters.

Click to listen