The appeals court said moving him now made it appear as if the government was seeking to evade the judicial review.
Mr Padilla was arrested in Chicago in May 2002 and is one of only two US citizens to be held as an enemy combatant.
The government said his transfer to a civilian prison would mean his appeal to the Supreme Court over his indefinite military detention was moot and should be dismissed.
However, the Virginia appeals court said on Wednesday that the hearing should take place.
It also turned down a request by the government to overturn a ruling by a lower court in September which upheld the government's right to hold Mr Padilla indefinitely - the basis of his appeal to the Supreme Court.
Sounds like another judge is a little upset with the Bush administration. Their habit of ignoring law and legal protections of US citizens is becoming very worrisome to many. Yesterday Judge James Robertson resigned in protest of the NSA listening in on conversations without warrants. This action has force the Bush administration to finally brief his court on the nature of this domestic spying, and the scope of it's operations.
If he is able, it would be interesting to hear his opinion of this operation. I wonder if we may have another judge damning the Bush White House.
Thanks to Brad (a reader) I have a link to the PFD of the 4th circuit's ruling.
His review after reading it: "In my career as a lawyer I have never seen a court come so close to calling the government a pack of liars as I have here"