By Andrew MacAskill, Sam Tobin and Michael Holden

LONDON (Reuters) -British Prime Minister Rishi Sunak's pledge to stop asylum seekers arriving in small boats across the Channel suffered a major setback on Thursday when the Court of Appeal ruled that his plan to deport asylum seekers to Rwanda was unlawful.

Under an initial 140 million pound ($177 million) deal struck last year, Britain planned to send tens of thousands of asylum seekers who arrive on its shores a distance of more than 4,000 miles (6,400 km) to the East African country.

Critics say the policy is inhumane and will not work. On Thursday the Court of Appeal concluded by a majority of two to one that Rwanda could not be treated as a safe third country.

"We're absolutely delighted that the Court of Appeal has upheld the argument Rwanda is not a safe country for people seeking asylum and that people will not be sent to Rwanda," Alison Pickup, director of Asylum Aid, a campaign group involved in the case, told reporters.

The ruling is a huge blow for Sunak, grappling with high inflation, rising interest rates and declining public support amid growing pressure from his party and the public to tackle rising numbers of asylum seekers costing 3 billion pounds a year to accommodate.

Sunak has made "stop the boats" one of five priorities, and hopes a fall in arrivals might help his Conservative Party pull off an unexpected win at the next national election.

Home Secretary (Interior Minister) Suella Braverman is due to make a statement to parliament later on Thursday.

The first planned Rwanda deportation flight was blocked a year ago in a last-minute ruling by the European Court of Human Rights (ECHR), which imposed an injunction preventing any deportations until the conclusion of legal action in Britain.

In December, the High Court ruled the policy was lawful, but that decision was challenged by asylum seekers from several countries such as Syria, Iraq and Iran, along with human rights organisations.

The appeal court ruled deficiencies in Rwanda's asylum system meant there were substantial grounds for believing that those sent there would be returned to their home nations where they face "persecution or other inhumane treatment".

"The result is that the High Court’s decision that Rwanda was a safe third country is reversed and that unless and until the deficiencies in its asylum processes are corrected removal of asylum-seekers to Rwanda will be unlawful," judge Ian Burnett said.

However, Burnett himself disagreed with the other two judges and a government source said it was likely to challenge the ruling in the Supreme Court.

Even if the government was successful there it would mean deportation flights were very unlikely to begin this year.

"IMMORAL, INEFFECTIVE"

Political opponents said the government should now scrap the policy, with the Liberal Democrats calling it "immoral, ineffective and incredibly costly for taxpayers" and a "vanity project" for Braverman.

Sending each asylum seeker to Rwanda would cost on average 169,000 pounds ($213,450), the government said this week.

Opponents also say the government’s policies were about driving political support and would not solve underlying issues.

They argue there are currently no legal routes for most asylum seekers fleeing war or persecution to apply for refugee status to enter Britain, so many see the dangerous small boat crossings as their only option.

Last year, a record 45,755 people came to Britain in small boats across the Channel, mainly from France. More than 11,000 have arrived this year, a rate similar to the first half of 2022.

The Rwandan government said that while the matter was one for the British courts, it took exception to the judges' conclusions.

"Rwanda is one of the safest countries in the world and we have been recognised by the UNHCR and other international institutions for our exemplary treatment of refugees," said government spokesperson Yolande Makolo.

"Rwanda remains fully committed to making this partnership work. When the migrants do arrive, we will welcome them and provide them with the support they’ll need to build new lives in Rwanda."

($1=0.7903 pounds)

(Additional reporintg by Philbert Girinema in Kigali; Editing by Angus MacSwan, Christina Fincher and Clarence Fernandez)