New Zealand and Australia warned Fiji last night that they would increase sanctions if the court's ruling were ignored.
In its decision, the Fijian Court of Appeal, headed by retired New Zealand judge Sir Maurice Casey, ordered Parliament to be recalled and President Ratu Josefa Iloilo to step down by March 15.
However, it did not specifically reinstate Mr Chaudhry or his Government.
The court ruled that Fiji's multi-racial 1997 constitution remained valid and had not been repealed by the military after the coup by George Speight and his followers in May last year.
"We conclude that the interim civilian Government has not proved it has the acquiescence generally of the people of Fiji.
"Accordingly, it cannot be recognised as the legal Government."
In an interview with Auckland's Fijian radio station Radio Tarana last night, Mr Chaudhry said the court ruling showed he was still the nation's rightful leader.
He said Parliament must be recalled immediately and any proposal for a Government of national unity could be considered only after the reinstatement of the legal Government.
"The reaction of the interim Government is not good," he said.
"They said they were going to go with whatever the court decided - now they are saying they are disappointed."
Interim Government Information Minister and SVT party leader Ratu Inoke Kumbumbola told Radio Tarana an emergency cabinet meeting had been called as soon as the court's decision was released.
"As a member of the interim Government, naturally I'm disappointed that the appeal has been unsuccessful."
He said the interim Government would make a statement today and another cabinet meeting would be held on Tuesday, after which a proposal would be forwarded to Acting President Iloilo.
New Zealand Prime Minister Helen Clark said she expected the "illegal interim Government" to begin today a process of consultation with other political forces in Fiji.
"Clearly if the interim Government did not abide by the decision and simply ignored it, then New Zealand's measures against Fiji stay, possibly even strengthen."
Under so-called smart sanctions, New Zealand banned about 80 people associated with the May coup from entering this country.
It sent home about 40 military personnel last July and declared a sporting-contacts ban, which was lifted for New Zealand to host the World Sevens rugby tournament in Wellington.
Helen Clark said fresh elections might be the best way forward for Fiji.
"On the other hand, there may be other routes like a Government of national unity, which would be acceptable.
"The present illegal Government has to be prepared to work with others to get an appropriate solution."
She and Foreign Minister Phil Goff have avoided insisting that Mr Chaudhry lead any new Government.
"We wouldn't want to get involved in debating who should lead interim Governments, Governments of national unity. That's for Fiji to work out."
Australia's Foreign Minister, Alexander Downer, said Canberra would not insist on Mr Chaudhry's reinstatement, but warned that if the court's decision were ignored, further sanctions might be imposed.
"We very much hope the interim Government in Fiji will respond to this decision in a way that upholds the rule of law, that acknowledges the judgment of the court and accepts the law as defined by the court.
"If, on the other hand, the interim Government in Fiji decides to blatantly defy the court, then obviously that will have further ramifications and we will consider that situation should that situation occur."
Transcripts: Fiji Court of Appeal judgment
Audio
(9 minutes, courtesy FM96)
Herald Online feature: the Fiji coup
Full text: Fiji High Court rules in favour of Chaudhry
Fiji President names new Government
Main players in the Fiji coup
The hostages
Fiji facts and figures
Images of the coup - a daily record
