Intel is completely in the right as far as I can see, but since we don't know exactly what the contract says . . .
This could spell the end of legacy software and, at worst, two different versions of Windows, with AMD using complete true 64 bit code and a bunch of new commands. It could also mean huge monopoly taxes on Intel as our government looks for new piles of cash to seize. And it could mean significant disruption in the computer market at a very difficult time, which might push some marginal companies over the edge.
I don't think Intel means to prohibit AMD from making X86 chips, though, especially given that Apple now uses Intel chips. More likely by far is that Intel wants to write a new, much more lucrative license agreement that would keep AMD in the X86 market, but without the R&D budget to be a serious competitor on innovation and performance. This isn't the first time Intel has declared the X86 licensing agreement void.