A team of lawyers, headed by David Hislop QC, presented fresh evidence to attack the credibility of the science used by Crown experts against Lundy, and the five Privy Councillors, including NZ Chief Justice Dame Sian Elias, agreed a jury should hear that evidence.
They ruled Lundy should stand trial again as soon as possible - but remain in custody unless granted bail.
The appeal hinged on seven grounds, the most crucial being a challenge to the reliability of the science used to identify DNA matter found on Lundy's shirt as brain tissue, the time of death and when the Lundy family computer was switched off.
The judges found that evidence put forward by the defence team was credible and "presents a direct and plausible challenge to a central element of the prosecution case".
In light of that, the Privy Council found the fresh evidence might have led a jury to acquit Lundy and therefore his convictions were not safe.
It decided the case should head back to the High Court - not the Court of Appeal - because "the divisions between the experts are so profound, they range over so many areas and they relate to matters which are so central to the guilt or innocence of the appellant, that ... they may only properly be resolved by the triers of fact in a trial".
A Crown Law spokeswoman said the decision rested on fresh expert evidence. There was no suggestion the trial in 2002 was unfair and no criticism of the Court of Appeal's decision dismissing his appeal.
John Key: Compensation discussion "jumping to conclusions"
Prime Minister John Key said in Bali last night there was very little he could say about the case because it would be returning to the High Court.
He said he hadn't read the judgement.
Asked if it would be make a good case for compensation he said "that would be jumping to conclusions.
"First there would be a retrial and then an outcome of the retrial.
"We'll take one step at a time."
Asked if there was something wrong with the justice system given the quashing of convictions in the Lundy and Bain murder cases, Mr Key said: "there have been two very high profile cases now where the Privy Council has essentially sent them back top the courts.
"Does that mean there is something wrong with our judicial system? No. It means that the final appellate court has decided that for whatever reason there is a case to go and re-look at the evidence that has been presented and the findings of the New Zealand Court.
"That happens to have been the Privy Council but it doesn't mean it wouldn't have been the case if it had through the Supreme Court."
"It just means these cases were in that system prior to the Supreme Court being in existence."
Main arguments in Lundy's original trial
The Crown case was that Lundy went to Wellington on August 29, 2000, on a sales trip. He checked into a motel at 5pm, and 30 minutes later received a phone call from his wife telling him Amber's Girl Guides meeting was cancelled and they were having McDonald's for dinner.
The Crown said Lundy convinced Christine to get Amber into bed by 7pm so they could have a romantic evening. He then drove 150km back to Palmerston North at high speed, parked 500m from his home, then ran inside around 7pm and attacked his wife with a tomahawk. When Amber got up to see what was happening, he killed her too. He then sped back to Wellington, arriving just before 8.30pm, when he phoned a friend.
Lundy said he stayed in Petone, read a book, drank alcohol and paid a prostitute to visit him at 11.30pm.
