The council was one of nine who joined forces to challenge the mayor's plan to allow affordable rents in new housing to be set at up to 80 per cent of the market rate.
They went to the High Court, arguing they should be able to lower rent limits. Until now councils could insist on social rents that were typically around 30 to 40 per cent of market level in inner London.
But in a judgement on March 25 Judge Beverley Lang ruled the mayor had acted within his powers.
Islington's executive member for housing and development Councillor James Murray, who led the legal challenge, said: "We took this case to the High Court because we wanted to be able to set lower rents limits across the board, and so we are disappointed that this judgement may make it harder to do that.
"But the judgement does recognise that boroughs can keep fighting for lower rent levels in individual developments, particularly where there’s no funding from the Mayor, and so it looks like there will be many more battles to come."