Padilla was in court when U.S. District Judge Marcia Cooke announced her decision, but he showed no reaction.
"This defendant clearly has the capacity to assist his attorneys," Cooke said just hours after she finished four days of competency hearings.
Defense attorneys and federal prosecutors declined to immediately comment.
Padilla's lawyers had asked Cooke to order that their client be treated for post-traumatic stress disorder, which they contend stems from years of isolation and interrogation while in military custody as a suspected enemy combatant.
Cooke said testimony in the competency hearing showed that Padilla understands "legal nuances" of pretrial motions and noted that he had signed a document verifying the truth of allegations made by the defense that he was tortured and mistreated during his years in a Navy brig in Charleston, S.C.
"At some time, the defendant was able to discuss some things with his lawyers," Cooke said. "The defendant's situation is unique. He understands that."
Bush administration officials vehemently deny that Padilla was mistreated, and Cooke said her decision on competency should not be read as a ruling on those claims. "That discussion is for another day," she said.
Padilla, a 36-year-old U.S. citizen, is charged along with two co-defendants with being part of a North American terror support cell that provided money, recruits and supplies to Islamic extremists around the world. All three have pleaded not guilty and face possible life imprisonment.
During the hearings into his mental conditions, expert witnesses described Padilla. His mother, Estela Ortega-Lebron, told CBS News producer Phil Hirschkorn she was having a hard time.
"I'm nervous, like any mother," Ortega-Lebron whispered. She sat in the third row of the gallery, directly behind her son, who was flanked by two of his four defense lawyers.
"They mistreated him for five years," she said. "They treated him like a dog."
A trial is set to begin April 16.
Anthony Natale, one of Padilla's court-appointed lawyers, had asked Cooke to send Padilla to a mental health center for at least three months.
"Give him nothing more than any defendant deserves and receives in this country," Natale said.
A court-appointed psychologist who works for the U.S. Bureau of Prisons rejected the defense's claim that post-traumatic stress disorder impaired Padilla's ability to assist his lawyers. The psychologist concluded Padilla is competent, even if he has some anxiety and anti-social personality problems.
Prosecutors contended that Padilla, a Muslim convert, attended an al Qaeda camp in Afghanistan that included indoctrination on resistance if captured. Assistant U.S. Attorney John Shipley suggested that indoctrination was behind his choice not to cooperate on some issues.
"That is a decision made by this defendant. That doesn't mean he's incompetent," Shipley said. "The issue is whether the defendant has the capacity to assist."
U.S. authorities initially claimed after Padilla's arrest in May 2002 that he was on a mission to set off a radioactive "dirty bomb" in a major city. He was held at the brig without being charged after President Bush declared him an enemy combatant.
Padilla was added to a Miami terrorism support case in late 2005. The "dirty bomb" allegation does not appear in the indictment.