"We emphasise that the Gaza Strip is controlled by a murderous terror group that operates incessantly to strike the state of Israel and its citizens, and violates every precept of international law with its violent actions," the three-judge panel wrote in its decision.
Israel will continue to supply some fuel and electricity, and the judges said those supplies would "fulfil the vital humanitarian needs of the Gaza Strip at this time".
'Required to act'
The court said Israel is "required to act against terror organisations in accordance with the norms of international law and abstain from deliberately harming the civilian population located in the Gaza Strip".
Gisha and Adalah, the two Israeli human rights groups that had challenged the sanctions, condemned the ruling.
"This is a dangerous legal precedent that allows Israel to continue to violate the rights of Gaza residents and deprive them of basic humanitarian needs in violation of international law," they said in a statement.
Palestinian officials say the cutbacks have harmed Gaza's already impoverished residents by causing power shortages and crippling crucial utilities.