The 18 claimants, aged nine to 22, said the defects were caused by their mothers' exposure to pollution in Corby, a former steel town in east central England.
Corby Borough Council (CBC), which was responsible for the reclamation of a former British Steel plant, one of the largest in western Europe, was found liable at London's High Court.
The council denied it was negligent during the works at the former British Steel plant between 1985 and 1999, and that there was a link between the removal of waste to a quarry and deformities affecting hands and feet.
Judge Robert Akenhead said Wednesday there was a "statistically significant" cluster of birth defects between 1989 and 1999, and the type of contaminants which could cause the birth defects were present on the site.
"There was an extended period between 1983 and August 1997 in which Corby Borough Council was extensively negligent in its control and management of the sites," he said.
"That negligence and, as from April 1, 1992, breach of statutory duty on the part of CBC permitted and led to the extensive dispersal of contaminated mud and dust over public areas of Corby and into and over private homes, with the result that the contaminants could realistically have caused the types of birth defects of which complaint has been made by the claimants.
Corby Borough Council chief executive Chris Mallender said: "We are obviously very disappointed and very surprised at the outcome of this trial."
The steelworks closed in 1980 with the loss of 10,000 jobs.
Council leader Pat Fawcett said: "There were mistakes at that time and we can understand why mistakes were made.
"British Steel closed and there were God knows how many unemployed in Corby, and it was trying to get industry into the town and things were done quickly -- maybe more quickly than they should have been done.
"But I think people were acting in the best interests of the town at the time."