The Defence Secretary has challenged a legal ruling won by two sisters to allow their father's final resting place to be designated a war grave.

Rosemarie Fogg and Valerie Ledgard's father, James Varndell, died with 20 others when the merchant ship SS Storaa was torpedoed by German E-boats ten miles south of Hastings in November 1943.

He was a Royal Navy gunner assigned to the ship to help protect it from attacks.

The sisters, both from Worthing, had won a legal bid in the High Court in London to designate the wreck a war grave.

However, a panel of three appeal judges headed by the Master of the Rolls, Sir Anthony Clarke, was yesterday told that if the High Court decision was allowed to remain, most merchant vessels sunk while travelling in convoy during the Second World War would have to be similarly protected.

Nigel Teare QC, representing Defence Secretary Des Browne, said High Court judge Mr Justice Newman misinterpreted the Protection of Military Remains Act when he quashed an October 2004 decision not to protect the wreck of the merchant ship SS Storaa.

Petty Officer Varndell, 44, died with the rest of the crew while the ship was travelling in convoy. The sisters fear divers are at liberty to disturb their father's remains. In 1985 the MoD sold the salvage rights to divers from Hastings Sub Aqua Association for £150.

The Ministry of Defence argued that the vessel and the grave of PO Varndell cannot be protected under the 1986 Act because he died on board a merchant navy ship not on military service.

His daughters accused the Government of unlawfully failing to honour the memory of their father and the shipmates who died with him.

Mr Teare argued yesterday that although the Storaa was armed and there were members of the forces aboard, like all convoy vessels, it was not in service with the armed forces but carrying a cargo between Southend and Cardiff.

He said: "Because it is in convoy does not mean it is under the directions of the armed forces."

If the High Court judgment was upheld, most if not all merchant vessels lost during the Second World War while in convoy would qualify as military vessels and thus eligible for designation, he said.

Under the Act, it is a criminal offence to interfere with a designated vessel.

Rosemary was 12 and Valerie just four when the Storaa went down in the Channel.

Judgment of the latest hearing was reserved to a later date.