Zoabi's party, Balad, had threatened an Arab boycott of the elections if the decision were upheld.
Her opponents cited several incidents in which she showed support for terrorism, including her participation in an attempt to forcibly break the naval blockade on Hamas that included an attack on IDF soldiers, and her meeting with senior Hamas terrorists.
The Elections Committee banned Zoabi under a clause requiring candidates and parties not to work against Israel's character as a Jewish, democratic state. The clause was previously used to bar Rabbi Meir Kahane from Knesset.
Due to time constraints, Sunday's verdict was published immediately, without the legal reasoning.
MK Zoabi welcomed a the ruling Sunday. "I respect the Supreme Court," she told Army Radio. "It must be said, it did not give in to right-wing racism."
"The time has come for us to set limits on the racists on the right," she added.
The Likud Beytenu party released a statement expressing disappointment in the verdict.
"In light of the Supreme Court's interpretation, it is clear the law has to change," the party added, "to state unequivocally that whoever supports terrorism cannot run for Knesset. Likud - Yisrael Beytenu will take immediate action in the next Knesset to fix the existing law."