The parents of a terminally-ill baby, Charlotte Wyatt, yesterday lost an appeal to force doctors to resuscitate her if she suffers respiratory failure.

But for the first time there was some hope for the family as the appeal court judges ordered an urgent review into her medical condition, given her "astonishing" improvement over the past year.

Darren and Debbie Wyatt said they were disappointed by yesterday's decision but remained confident that at an upcoming review, the court would reverse its decision, which allows doctors to refuse their daughter ventilation.

The Wyatts have been fighting the doctors treating 22-month-old Charlotte at St Mary's hospital in Portsmouth since last October when she was declared blind, deaf, severely disabled and with only a 5% chance of surviving the winter.

In March, after Charlotte defied all predictions, they returned to the high court when Mr Justice Hedley upheld a declaration that it would not be unlawful for doctors to refuse to ventilate her.

Yesterday, they appealed against that decision, saying the judge had not taken into account the fact that Charlotte was improving.

Refusing the appeal, Lords Justice Laws, Wall and Lloyd said they had found Mr Justice Hedley's decision to be correct but added: "We attach a high importance to the up-to-date position being properly investigated with a view to deciding if the declaration should continue."

Outside the court, Richard Stein, solicitor for the Wyatts, said: "Darren and Debbie are disappointed that the court of appeal rejected their appeal today which means that the hospital can still not ventilate Charlotte if she needs it. They are pleased, however, that the court recognises her continued improvement."

Charlotte was born three months premature in October 2003 with serious heart and lung problems and brain and kidney damage. Until this year, it was thought she was blind, deaf and unresponsive to stimulation. Doctors said she was in constant pain and derived no pleasure from life.

But this month, it is said Charlotte can see and hear and show enjoyment when she is bathed or tickled.

While a year ago she was kept a "prisoner" in an oxygen box that fed her 95% oxygen because of her fragile lungs, Charlotte now spends several hours a day with just a nasal tube, she sits in a chair and is sometimes taken outside the hospital building. She is down to 40% oxygen in her air and there are discussions about taking her home should she continue to get better.

"What makes Charlotte's case unique is the extent to which she has defied expectations in the past," said David Wolfe, for the Wyatts.

He argued that the continuation of the court declaration in favour of the hospital was putting immense pressure on both Mr Wyatt, 33, and Mrs Wyatt, 24, who is 21 weeks pregnant with the couple's fourth child. They have two older sons, Daniel, three, and David, nine months.

Mr Wolfe told the court: "The doctors should not have in their back pocket an open consent from the court to let Charlotte die regardless of the circumstances at the time and regardless of the views of her parents. Darren and Debbie say the time has come to lift the threat that has hung over Charlotte and her family for nearly a year."

While the Wyatts agree that in some cases ventilation would not be right for their daughter, they think she is now able to cope with a higher degree of medical intervention.

"We are not simply delaying death now but returning her to life after ventilation. Without ventilation, she will certainly die if she needs it," said Mr Wolfe.

The court heard that relations between the Wyatts and Charlotte's doctors had become strained, with the Portsmouth's hospitals NHS trust complaining of abusive phone calls to medical staff and interruptions in administering care.

Lawyers from the trust admitted Charlotte's improvement had been "remarkable" but said she still suffered from a serious underlying lung disease that would make ventilation both distressing and unproductive.

"The consequences of her getting an infection are unchanged," said David Lock. "She will still suffer terrible indignity and pain if ventilated."

He added: "Just because a medical procedure can be attempted, does not mean it should be attempted."

He added: "This is not a case about who cares most for Charlotte ... she is still a perilously sick child."

Mr Lloyd said the strain of withdrawing the declaration on doctors and nurses treating Charlotte would be intolerable with lawyers almost constantly on standby.

A review hearing is to be set for a full investigation into Charlotte's up-to-date medical condition at the earliest time in Mr Justice Hedley's calendar, thought to be in October.

How she's changed

The court was given evidence of Charlotte's condition from doctors and the Children and Family Court Advisory and Support Service (Cafcas) monitors. The evidence showed a marked change in her condition between October 2004 when her case was first brought before the court and this month.

Then Doctors described her as "slowly dying" with a 5% chance survival of the winter

Now Going home "could happen in the future"

Then Constant pain

Now Pain free most of the time

Then No smiling and she derived no pleasure from life

Now Enjoys her bath and being tickled

Then Could not see, no evidence she was visually aware

Now Looks at a toy above her head and derives pleasure from following objects in front of her

Then No sense of sound

Now May well have relatively good hearing

Then Made no deliberate actions

Now It is believed she attempted to hold a bauble

Then No head growth, length or weight increase

Now Head has grown a few millimetres and she has gained weight and length equivalent of 10 weeks in age over 12 weeks

Then Quality of life described as "terrible... dominated by pain and suffering"

Now "A better quality of life"