Headfield Church of England Junior School in Dewsbury, northern England, had asked Aishah Azmi, a 24-year-old teaching assistant, to remove her veil in order to communicate. When she refused, they suspended her.
Azmi filed a discrimination case against the school.
On Thursday, an official at the Kirklees Council, West Yorkshire, said Azmi's claims of direct and indirect discrimination and of harassment had been thrown out by the employment tribunal.
But she was awarded 1,100 pounds for "victimisation" because the council failed to follow grievance procedures correctly.
Azmi's lawyer said they intended to appeal and possibly take the case to the European Court of Justice.
Azmi's case has attracted nationwide interest after Jack Straw, the former foreign minister, said that Muslim women who wore full veils made community relations difficult.
Straw had said that he would prefer women not to wear veils because they acted as a "visible statement of separation and difference".
Azmi told reporters at a news conference afterwards that her veil, which leaves just the eyes exposed, had never hindered her teaching.