Funding for the school was refused in 2014 by Deputy Education Minister Sander Dekker, after a member of the school's board voiced support for the so-called Islamic State jihadist group.
But the Council of State on Wednesday found there "is no valid reason for refusing the funding" after hearing the school had distanced itself from the man's remarks as well as any kind of extremism.
The man in question had also been dismissed from the board, the court said in its ruling.
Dekker was ordered by the court to reverse his decision and find finances by Tuesday, August 1, ahead of the start of the next school year.
The issue of Islam and its influence on Dutch society has long fuelled debate here, with outspoken far-right MP Geert Wilders having made a ban on the Koran and mosques a central plank of this year's parliamentary elections.
His Freedom Party is now the second largest political group in parliament after winning 20 seats in the March polls.
The school, which would become only be the second Islamic high school in the country, is expected to welcome some 200 students this year. Dutch media reported it would have to be housed initially in temporary accommodation.
Dekker said he was frustrated by the decision, and still had concerns about "the quality of the education" that would be offered.
"We must do everything we can to ensure that our children get the education that they are entitled too, and learn what it means to be part of Dutch society," he told public broadcaster NOS.
He has also asked the schools inspectors to check whether the school meets the country's educational requirements.
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