Germany's Federal Constitutional Court has refused to issue an injunction which would have blocked ratification of Europe's permanent rescue fund, the European Stability Mechanism.
The ruling effectively decides that Germany can participate in the ESM, that was set up to support countries in financial trouble and which cannot function without German involvement.
While the judges have cleared the way for the ESM to become law, they have also applied conditions.
The judgment has stipulated that if the German contribution to the fund exceeds €190 billion, the German parliament must approve it.
"This is a good day for Germany and a good day for Europe," German Chancellor Angela Merkel said in a speech to parliament.
European markets rose following the decision and Italian and Spanish borrowing costs fell.
European Parliament President Martin Schultz said the court ruling was good news for the European economy.
However, he also suggested its ruling proves that the European Parliament needs to have a major role in supervising the ESM and the ECB in its role in surveillance of Europe's banks.
He said the ruling in Karlsruhe is clear on the rights and privileges of the German parliament, but the interpretation that democratic legitimacy is based on "parliamentarian frames" is not only valid on a national level.
Mr Schultz added that the ruling is also a clear message that the ESM and role of the ECB needs democratic legitimacy and that can only come at a European level from the European Parliament.
The ESM was supposed to come into effect in July as a €700 billion firewall to stop the three-year-old debt crisis from spreading.
Germany is the only country where ratification is still pending; the fund needs approval by countries representing 90% of its capital base, and Germany's share is more than one quarter.
Ruling 'very positive' for Ireland - NTMA head
The head of the National Treasury Management Agency John Corrigan says the German constitutional court ruling is "very positive" for Ireland's efforts to return to market funding.
He said the yield on Irish bonds fell significantly on the news, the cost of borrowing for Ireland has fallen below 5.5% today.
The benchmark nine-year Government bond currently has an interest rate or yeild of 5.43%.
Mr Corrigan said he expects the positive sentiment to carry through into tomorrow's auction of three month treasury bills.
He also said last week's announcement by the ECB that it would buy government bonds, but would not seek seniority in repayments was positive for government debt "at the short end".