The law requires cigarettes to be sold in olive green packets, with graphic images warning of the consequences of smoking.
Leading global tobacco manufacturers, including British American Tobacco and Philip Morris, had challenged the law.
The new packaging rules are scheduled to be implemented from 1 December 2012.
"At least a majority of the court is of the opinion that the Act is not contrary to (Australia's constitution)," the court said in a brief statement.
The full judgement is expected to be published on a later date.
'Still a bad law'
The law was passed by the government last year. Authorities have said that plain packaging of cigarettes will help reduce the number of smokers in the country.
However, tobacco manufacturers have argued that removing their brand names and company colours from packets will lead to a drastic cut in profits.
They have also warned that it may result in fake products entering the market.
"It's still a bad law that will only benefit organised crime groups which sell illegal tobacco on our streets," said Scott McIntyre, spokesman for British American Tobacco (BAT) Australia.
Sonia Stewart, spokesperson for Imperial Tobacco, added that "the legislation will make the counterfeiters' job both cheaper and easier by mandating exactly how a pack must look".
Cigarette manufacturers have also claimed that the law is unconstitutional and infringes on their intellectual property rights by banning the use of brands and trademarks.
However, BAT's Mr McIntyre said the firms will comply with the new rules.
"Even though we believe the government has taken our property from us, we'll ensure our products comply with the plain packaging requirements and implementation dates."
'Deluge of legislation'
Australia's new tough packaging laws are the first of their kind to be implemented in the world.
However, many other countries such as New Zealand, India, the UK and even some states in the US have been contemplating taking similar measures in a bid to reduce the number of smokers.
As a result, the case between the government and the cigarette makers was being watched closely all across the globe.
Jonathan Liberman, director of the McCabe Center for Law and Cancer, said the ruling was likely to give a boost to other countries looking to take similar steps.
"It shows to everybody that the only way to deal with the tobacco industry's claims, sabre rattling and legal threats is to stare them down in court," he said.
The BBC's Sydney correspondent Duncan Kennedy said the decision may have global ramifications for the cigarette makers.
"Whilst Australia might be a relatively small cigarette market, tobacco companies know that losing here could lead to a deluge of legislation elsewhere in their really big markets."
Source has some pics of the new packets that look pretty gruesome: http://www.bbc.co.uk/news/business-19264245
OP: As an ex-smoker I'd say this is about right. I don't begrudge smokers their cigarettes but if they have all the information of what they do to you then they can make a more informed choice.
The same goes for alcoholic and higher-calorie products lets have more visible warnings there too so we don't victimise smokers.