Portugal's Constitutional Court ruled on Thursday a government bid to cut civil servants' pensions "unconstitutional."
The move foresaw cuts of around 10 percent for pensions over 600 euros, and would have saved the government around 380 million euros.
However, in a response to a requested anticipatory rule by President Anibal Cavaco Silva, the court has ruled the move "violates the principle of trust," meaning the government will now have to search for alternative measures to meet its bailout targets.
The country passed its 10th bailout review by the troika of international lenders -- the European Commission, the International Monetary Fund and European Central Bank, earlier this week, but the next aid tranche is unlikely to come until the draft budget's numbers add up.
Earlier this week, Prime Minister Pedro Passos Coelho admitted the only alternative he might find could be a further tax hike.
The government may not have too much trouble in finding an alternative, but Subir Lall, head of the IMF mission to Portugal, believes an alternative measure could be less favourable for the country's economy.
"From a fiscal point of view, I'm very confident that the government will be able to fill the hole," Lall told the Financial Times. "But when you have to find alternative measures, there is always a risk they will be second-best in terms of promoting economic growth and employment."
On Thursday, tens of hundreds of protesters gathered outside the Presidential Palace in Lisbon to call for an end to further wage and pension cuts.
The government has been applying harsh austerity since the country was bailed out in May 2011 under a 78-billion-euro bailout deal signed with the troika of international lenders.