The nine-justice court ruled unanimously Haneen Zoabi "shall be a candidate for the Knesset" in a Jan. 22 poll without giving details of its reasons.
Zoabi drew widespread criticism in Israel for taking part in an international aid flotilla that challenged the Israeli blockade of the Gaza Strip, territory ruled by Hamas.
She was on the Mavi Marmara when Israeli naval commandos raided the Turkish vessel in May 2010, killing nine Turks in clashes with activists on board.
The Central Elections Committee voted on Dec. 19 to disqualify Zoabi, saying she had shown "support for an enemy state or terrorist organization engaged in armed conflict against Israel".
Zoabi has said she had no role in any of the violence on board the Mavi Marmara and had tried to mediate between the sides during the raid.
Environment Minister Gilad Erdan criticized the ruling saying Zoabi had been involved in "expressing solidarity with our enemies".
Zoabi told Israeli Army Radio the judges had "avoided giving in to the racist right".
The Central Elections committee, which authorizes parties' candidates ahead of votes, is chaired by a Supreme Court justice and made up of legislators from a number of political factions.
It has tried several times in the past to disqualify Arab political parties for alleged disloyalty to Israel, only to be overruled by the Supreme Court on appeal.
Zoabi belongs to the tiny Balad party that believes Israel should not be defined as a Jewish state, but instead be a democracy for all its citizens.
Most of the Palestinians who make up about 20 percent of the Israeli population are related to or descended from those who fled or were driven away in a 1948 war over Israel's establishment.
They are full-fledged citizens, although rights groups say that Palestinians living in Israel face discrimination in employment, education and public funding.Ma'an staff contributed to this report
JERUSALEM (Reuters) -- Israel's Supreme Court ruled Sunday that a Palestinian-Israeli lawmaker could stand in elections, overturning her disqualification by electoral officials over her participation in a Gaza-bound aid flotilla in 2010.