The setback comes at the worst possible time for both Zuma and the ANC, with elections expected around April at which they will face the biggest challenge since the end of apartheid in 1994.
Zuma will be the party's presidential candidate but could now go into the vote with hefty graft charges hanging over him.
Prosecutors say the ruling means Zuma remains charged with corruption, fraud and money laundering.
This will severely hurt his image, internationally and at home, during a battle to fend off a challenge from a new party of ANC dissidents called the Congress of the People (COPE).
Zuma's lawyers may appeal to the constitutional court, the highest in the country, which will drag out the case further.
Despite the charges, Zuma is likely to remain the ANC's choice as president and has said before he will only step down as president if found guilty of the corruption and fraud charges.
Prosecutors and Zuma are reportedly keen to secure a deal that will end the long-running saga.
A settlement may suit Zuma if it looks like he will face new charges and a trial that will either coincide with the election, or punctuate the first years of his presidency. It will also hurt South Africa's image having a president face a possible sentence in jail.
Zuma cannot be elected to parliament, and therefore become the country's next president, with a conviction of more than one year's prison term, so the deal will have to be for a lesser punishment than that.