The five-member Arbitration Panel, appointed by the holders, ruled that the challenge by the Societe Nautique de Geneve, is valid.
The disagreement between the two clubs arose because of the Deed of Gift, which governs the America's Cup, that states a challenging club must hold its annual regatta on "the sea, or an arm of the sea".
Land-locked Lake Geneva, where the club is based, is not considered an arm of the sea, but they held a regatta on the Mediterranean Sea this year.
Commodore of the Squadron Peter Taylor said: "Now that we have this judicial interpretation of the rules, there can be no questions raised at a later date by other challengers about the eligibility of the Swiss challenge."
The Swiss challenge, headed by Ernesto Bertarelli, poached New Zealand's Cup winning skipper Russell Coutts, and a number of other core members of the team, in June this year.
The Swiss challenge have also announced the signing of Australian sail designer Grant Simmer, who was navigator on Australia II when she became the first boat to win the Cup from America in 1983.
The next America's Cup will be sailed on Auckland's Hauraki Gulf in March 2003, with the Louis Vuitton Cup to select a challenger starting in October 2002.
At least ten challenges are expected by the closing date in March 2001, with America, Sweden, Switzerland, Germany, Italy, France and Britain, all likely to be represented.
Reuters
America's Cup holders, the Royal New Zealand Yacht Squadron, accepted the Swiss challenge for yachting's biggest prize on Monday after a month of legal wrangling.
