The prime minister's wife has failed in her legal challenge on behalf Gurkhas who receive less favourable pay and pension provision after serving in the British army.

High Court judges ruled against Cherie Booth, who claimed that the government "irrationally and unlawfully" denied them pay and conditions equal to those of British soldiers.

Mr Justice Sullivan said differential treatment was legal when the difference of living in Britain and Nepal was taken into account.

"There is simply no evidence to support the contention that the differences between Gurkha pensions and those of British soldiers is disproportionate or irrational once it is acknowledged, as the claimants do now acknowledge, that it is lawful to make different arrangements for Nepalese citizens who will retire to Nepal," he said.

"I am aware how strong the claimants feel about their pension arrangements. I fear sweeping allegations of institutional discrimination alleged in their claim forms may have given rise to unrealistic expectations. If these are to be dashed, then the claimants deserve the fullest explanation."

Ministry of Defence lawyers representing Tony Blair's administration disputed the case in a two-day hearing earlier this week.

A decision against the government could have opened the floodgates to £2 billion in pay and pension claims.

Up to 30,000 other soldiers were set to take action if the case of the seven Gurkhas was upheld.

In a test case for human rights law, Booth argued that the case concerned "systematic and institutionalised" inequality.

She said the MoD was guilty of "less favourable treatment of Gurkhas soldiers in comparison with other members of the British armed forces on the grounds of their race and nationality".

She told court chairman Justice Sullivan: "It is part of the culture of the British army in which, on the one hand Gurkhas are acknowledged to be brave fighters who have provided loyal service to the Crown for nearly 200 years...and even today serve in Kuwait."But on the other hand, they are treated as different and inferior in relation to other parts of the British army on terms and conditions of service."

The MoD had claimed its policy remained within the European Convention on Human Rights.