The Ibuka association representing survivors slammed the decision in the case of former business tycoon Felicien Kabuga, accused of setting up a hate broadcaster that fueled the 1994 slaughter of around 800,000 people.
"The ruling to potentially release Kabuga is a deliberate insult to the deep wounds that genocide survivors suffer," Naphtali Ahishakiye, executive secretary of the group, told AFP.
The survivors are "extremely angry and disappointed," said Ahishakiye, saying it set a "deplorable precedent."
In June, judges found Kabuga was not fit enough to go on trial but ruled he should still undergo a stripped down legal process without a verdict.
Appeals judges rejected that on Monday, saying the lower court made an "error of law" and ruling Kabuga, who is 88 according to officials but claims to be 90, should be urgently considered for release.
Captured in Paris 2020 after two decades on the run, wheelchair-bound Kabuga went on trial last September and pleaded not guilty.
Prosecutors accuse Kabuga, once one of Rwanda's richest men, of being the driving force behind Radio-Television Libre des Mille Collines, RTLM, which urged ethnic Hutus to kill Tutsis with machetes.
But judges said in June that medical experts had now found he has "severe dementia."
The court first put the trial on hold in March over health concerns, having earlier dismissed bids by Kabuga's defense lawyers to have him declared unfit to stand trial.
Ahishakiye slammed Monday's outcome and said his group was now considering cutting ties with the International Residual Mechanism for Criminal Tribunals.
"Aligning with a court that continuously shields genocide perpetrators at the expense of justice for survivors has lost its rationale," hence "our continued cooperation with this court is untenable — it serves no purpose."
Prosecutor Serge Brammertz said he had carefully reviewed the Appeal Chamber's decision and "its decision must be respected, even if the outcome is dissatisfying."
"My thoughts are with the victims and survivors of the Genocide," said Brammertz, recognizing that "this outcome will be distressing and disheartening to them."
He cited the recent arrest of former police inspector Fulgence Kayishema, accused of a massacre, as evidence the Kabuga ruling "is not the end of the (overall) justice process."
Defense counsel Emmanuel Altit told AFP he welcomed the appeal judges' ruling.