Israeli lawmakers passed the law in March 2023 as part of the government's controversial legal reform plan.
Critics said the law aims to protect Netanyahu from being deemed unfit to rule due to allegations of conflicts of interest.
Netanyahu is working to reshape the judicial system amid his trial on corruption charges.
The court's ruling, which was voted on by 6 votes to 5, comes two days after the same court canceled the first major provision of the comprehensive reform in a blow to Netanyahu's government.
The next parliamentary elections are expected to be held in 2026 but could be held earlier.
Netanyahu is being tried on charges of fraud, breach of trust, and accepting bribes in three separate cases. He denies any wrongdoing.
Netanyahu's preoccupation with legal reform has raised questions, including from the country's attorney general, about whether this constitutes a conflict of interest during his trial.
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