The ruling on Thursday clears the way for recognition of conversions performed by reform or conservative rabbis in Israel, according to Army Radio.
The verdict, which was reached by 11 judges, could also have far-reaching implications for Israel's conversion system.
Up to now, Israel's Orthodox community has had sole responsibility for handing out the certificates of conversion which are recognised by the interior ministry.
Under Israel's Law of Return, all Jewish immigrants are allowed to become Israeli citizens, but conversion to Judaism is a long process obliging candidates to learn the basics of the Jewish religion and how to apply that to their daily lives.
The ruling comes as Israeli police banned extremist Orthodox Jews from demonstrating at Jerusalem's al-Aqsa compound, fearing the ultra-nationalists would incite anti-Arab violence.
In a police statement released on Wednesday, security forces said "after evaluating the situation and intelligence from various security services it appears there is a real possibility that trouble could break out".
One group in particular, the Revava, says it still plans to rally on the compound on 10 April despite the ban.
The group is linked to the Kach movement, which advocates the expulsion of all Arabs from "Greater Israel" - which stretches from the Mediterranean to modern-day Jordan.
In Gaza City, the al-Aqsa Martyrs Brigades, an offshoot of the mainstream Fatah faction, threatened to renounce its ceasefire if the Jerusalem shrine was attacked.
"If the Israelis harm our sacred sites, we will overturn any commitment to any ceasefire and react anywhere," spokesman Abu Yusuf said.