Federal agencies have to follow certain procedures, including collecting public comments, before repealing government regulations, the ruling said.
Raising environmental concerns, Interior Secretary Ken Salazar called on the courts in April to withdraw the rule that allowed coal mine operators to dispose of excess mountaintop debris in and within 100 feet of nearby streams whenever alternative options are deemed "not reasonably possible."
The Bush regulation replaced a 1983 rule that allowed dumping within 100 feet of a stream if it would not "adversely affect the water quantity or quality or other environmental resources of the stream."
Interior spokeswoman Kendra Barkoff said the department is examining the court's decision.
"This administration has shown it is determined to improve mining practices and we will do so within the context of the court's ruling, which we are reviewing," Barkoff said.
The National Mining Association applauded the ruling.
"The court has preserved an open and transparent regulatory process that provides for notice and protects the rights of all interested parties to comment," association president Hal Quinn said in a statement.
More than half of U.S. electricity is generated from coal. U.S. surface coal mining is mostly done in the steep mountains of Appalachia, across Virginia, West Virginia, Tennessee and Kentucky and accounts for about 10 percent of U.S. coal production.
Major energy companies, such as Arch Coal Inc and Consol Energy, participate in mountaintop mining, which involves scraping the surface of mountains and pushing the crumbled mountaintop debris into adjoining valleys.