The three-judge panel upheld Lara Alqasem's appeal against the ban, clearing the way for the 22-year-old to take her place on a master's degree programme at Jerusalem's Hebrew University.
The decision to bar her from entry, the court ruled, "was not within the bounds of reason and is revoked".
Alqasem landed at Ben Gurion Airport on October 2 but despite having a visa, she was not allowed to clear immigration due to a 2017 law barring supporters of the Boycott, Divestment and Sanctions (BDS) movement.
Ordered to return to the United States, she decided instead to stay in Israel and challenge the ban.
She has since been in detention at the airport.
Lower courts rejected two appeals.
Reportedly of Palestinian descent, Alqasem had been president of a chapter of Students for Justice in Palestine during her undergraduate studies at the University of Florida.
The group has supported boycott campaigns against Israel.
Alqasem says she left SJP in 2017 and is no longer part of the BDS movement.
At Wednesday's Supreme Court hearing, Alqasem's lawyer said the state should apply common sense when applying the law against BDS supporters.
"Why would she want to enter Israel to call for a boycott?" Yotam Ben Hillel asked.
The Hebrew University has said it wants Alqasem to take up her studies.
A representative said foreign students and researchers provide "oxygen" for local academia and that their presence could counter boycott efforts.
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