This decision could pave the way for the army to expand the area it controls along the flashpoint boundary.
The Palestinian Centre for Human Rights (PCHR) in Gaza filed a petition to save 13 houses along the border from being demolished.
According to a United Nations agency, Israeli occupation forces demolished nearly 100 Palestinian homes during an intense three-day army operation in the area last week. More than 1000 Palestinians have been left homeless as a result.
Israeli media reported the army was demolishing Palestinian homes - and sought to destroy the 13 along the border - in order to expand an Israeli-controlled road running along the border.
The court, which had issued its temporary injunction on Saturday, gave the army permission to demolish houses in the camp "according to operational needs" or if the military determined that soldiers' lives were in danger.
According to the PCHR, Israeli occupation forces have demolished at least 2000 Palestinian homes, either completely or partially in the Rafah refugee camp, since the beginning of the current Intifada (uprising) in September 2000.
Home demolitions are reportedly
conducted 'without warning'
The organisation says "demolitions are usually conducted without warning allowing no time to appeal against the operation and no time to retrieve possessions."
"The extensive destruction of civilian property carried out wantonly and unlawfully and without military necessity constitutes a grave breach of the Fourth Geneva Convention and a war crime as defined in Article 85.5 of the First Additional Protocol to the Geneva Conventions," the PCHR adds.