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Ines Del Rio Prada, a member of Basque separatist group ETA, has been in jail since 1989 for offences linked to terrorist attacks, and had been scheduled for release in 2008 until a ruling by the Spanish High Court Audiencia Nacional extended her sentence to 2017.
The European Court of Human Rights ordered Del Rio Prada's release in July 2012, but is now re-examining the case upon request from the Spanish government.
The Strasbourg-based court's Grand Chamber heard three hours of arguments in a court packed with over 200 people, before withdrawing to deliberate.
A final judgement on Del Rio Prada's fate is expected on a later date which has yet to be announced.
The Basque militant was jailed in 1989 after being slapped with a cumulative 3,000 years in prison sentences for offences linked to terrorist attacks.
In 2000 the Audiencia Nacional combined her sentences into a 30-year jail term. In 2008 prison authorities recommended she be released that year, allowing for remission for work done in prison.
However the Audiencia Nacional rejected this, citing a change in case law in 2006 which ruled remission was to be applied to each sentence individually. It set the new date for her release as June 27, 2017.
Spain said Wednesday the European Court of Human Rights had overstepped its role by taking a stand on the way in which it applied sentence remissions.
Government attorney Sanz Gandasegui warned that upholding the ruling against Spain could have significant consequences on other convicts' jail terms, including 54 members of ETA and 15 common-law prisoners.
ETA is blamed for more than 800 deaths in a four-decade campaign of bombings and shootings for the independence of the Basque homeland, which straddles northern Spain and southwestern France.
Considered a terrorist group by the European Union and the United States, it announced in October 2011 that it was giving up its armed struggle. But it has yet to formally disarm, and the Spanish government has refused to hold talks with its leaders.