The court has sent the case back to federal court for a new sentencing hearing.
Padilla and two others were convicted in 2007 of supporting Islamic extremist groups, including al-Qaida.
Padilla was arrested at O'Hare International Airport in 2002. Authorities suspected he was plotting to set off a dirty bomb. He was held as enemy combatant for more than three years.
A three-judge panel of the 11th U.S. Circuit Court of Appeals ruled Monday that the sentence imposed by a Miami federal judge was too lenient.
Padilla and two co-conspirators were convicted in 2007 after a three-month trial in which prosecutors said they sent money, recruits and supplies to Islamic extremist groups including al-Qaida. The appeals ruling upheld all the convictions.
The Associated Press contributed to this report.