The case was brought under the "universal competence" law which originally allowed Belgian courts to rule on crimes against humanity regardless of the nationality of the perpetrator or where the crimes took place.
Faced with pressure from Washington, the Belgian government agreed this year to scrap the law, and in August parliament approved a new, watered-down version.
"The court ruled that it must apply the new law," lawyer Jan Fernon said in Brussels on Tuesday. Fernon, who represented plaintiffs in the case, said he had not ruled out taking the case to Belgium's supreme court, the Cour de Cassation.
The lawsuit against General Franks was filed in May by 17 Iraqis and two Jordanians over the use of cluster bombs in civilian areas of Iraq.
The Belgian government ordered that the case against Franks be handled in the United States, on the basis of an amendment to the universal competence law that was passed in April, and the case was then dropped.
But a lawyer for the plaintiffs contested decision earlier in September, saying it violated the separation of executive, legislative and judicial powers.
The controversial 1993 law drew fierce attack from Washington, which in June warned that application of the law could threaten Brussels' role as host to international organisations like NATO.
"The court ruled that it must apply the new law"
lawyer for plaintiffs
In a separate case, the Cour de Cassation is due to rule on Wednesday on three suits brought under transitory measures that were approved while the universal competence law was being modified.
These measures require Belgium's highest court to halt all cases brought under the law, except for those involving plaintiffs who are Belgian nationals.
Two of the suits target Israeli Prime Minister Ariel Sharon - although he has immunity while he remains head of government - and Israeli General Amos Yaron over massacres in 1982 of Palestinians at the Sabra and Shatila refugee camps in Lebanon.
The third case targets US leaders at the time of the 1991 Gulf War, including former president George Bush and current US Secretary of State Colin Powell.
The scaling back of Belgian courts' war crimes jurisdiction law has failed to prevent new cases being filed against foreign leaders that have the potential to embarrass the government in Brussels.
In August six members of China's outlawed Falungong religious movement, including one Belgian national, filed an official complaint in Belgium against former Chinese president Jiang Zemin for crimes against humanity.