The admission marked the first time that the strategic U.S. ally detailed how many militants it is holding in the tribal areas of the northwest under the Actions in Aid of Civil Power Regulations law.
"There is a military operation in Waziristan. Under the law we cannot try these 700 people, nor can we release them, unless the operation is over," Attorney General Irfan Qadir told the Supreme Court, referring to a tribal area near the Afghan border.
In December, Amnesty International condemned the law, saying it "provided a framework for widespread human rights violations to occur with impunity".
"Many of the men held by the Armed Forces are subjected to enforced disappearance, tortured or otherwise ill-treated while in custody," said the report.
Pakistan's military has denied allegations of abuses.
Pakistan's Taliban, which is close to al Qaeda, is waging a violent campaign to topple the government and impose its radical interpretation of Islam. It has carried out suicide bombings and assaults which have killed both civilians and security forces.
Pakistani intelligence services and security forces have come under closer scrutiny by the Supreme Court, which has challenged intelligence agencies and ordered investigations into missing persons.
The Supreme Court is currently hearing a case of seven suspected militants held without charge since May 2010.
Pakistan's intelligence agency produced the men in court last February on judicial order. Several were in terrible physical condition and could barely walk.
The Supreme Court is calling for their release and has asked intelligence agencies to explain why the men are being held.