Basque party Batasuna had appealed a Supreme Court ruling last March banning its activities, but the constitutional court unanimously threw out the appeal.
The Spanish government welcomed the ruling, with the Interior Minister Angel Acebes saying the ruling was highly significant.
"It deals with Batasuna in a complete and definitive manner," Acebes told a regional meeting of Spain's ruling Popular Party.
Government spokesman Eduardo Zaplana said he was delighted the court had upheld the original ruling.
Zaplana said the decision means Batasuna "will not be able to utilise political institutions either to finance itself or transmit messages and calls to violence."
A Popular Party spokesman in Basque country, Leopoldo Barreda said the judges' decision was in accordance with the Spanish constitution and the legal "norms of a state bound by the rule of law."
He added the ruling was "good news" for Spain and refuted Batasuna assertions that banning the party was undemocratic.
ETA's armed campaign for a separate homeland in northern Spain and southwestern France has left an estimated 800 people dead over the past three decades.
ETA killed three people in 2003 in the smallest annual death toll since 1973.
According to Acebes, 187 members of the organisation were caught last year as French and Spanish police tightened cross-border cooperation.