I GUESS IT'S NOT 1984 YET: The Second Circuit has ordered the release of Jose Padilla. Here's a link to the opinion, but I can't get it to open -- the server seems to be saturated at the moment. Judging by the Reuters story, the court put emphasis on Padilla's American citizenship, and on the fact that he was on American soil -- both appropriate considerations in my opinion.
UPDATE: Okay, it's opening now. Those do appear to be the considerations, based largely on lack of Congressional authorization for detention of Americans as enemy combatants on American soil. The court goes out of its way to emphasize that the government has "ample cause" to believe that Padilla was implicated in a "terrorist plot," making clear that this decision is about the law, not the facts.
ANOTHER UPDATE: Okay, I've skimmed the opinion very quickly. Based on both Constitutional analysis (the Third Amendment is even cited, a rarity) and on statute (the Non-Detention Act, 18 U.S.C. sec. 4001(a)), the President lacks inherent authority to detain American citizens as enemy combatants when seized on American soil outside a zone of actual combat. For those of you studying for Con. Law exams, the President is placed thoroughly in Jackson Category Three. The Quirin case, involving Nazi saboteurs, is distinguished.
This seems right to me, based on my rather quick read of the opinion. I think that the real danger in Presidential authority to detain terrorists comes when it's applied to American citizens in America, since that's where the risk of politically motivated abuse is highest. Whether Congress has the power to authorize such detention isn't addressed in the opinion, but I would incline toward the position that it does not.
Meanwhile, here's a link to the dissent, which argues that the President does have such inherent authority, and that it is not defeated by the Non-Detention Act.
And, by the way, they don't have to let Padilla go -- just release him from military custody. They can transfer him to civilian custody for further prosecution, and the majority, in the conclusion to the opinion also notes that he can be held as a material witness in connection with other civilian prosecutions.