The U.S. Court of Appeals' 2-1 decision said, however, that the rule's applicability to three other states needs more review.
The EPA issued the directive in late 1998, but saw it locked in limbo last May because of a lawsuit and a temporary stay that the suit prompted.
The regulation, aimed largely at curtailing the long-distance travel of pollution from the Ohio Valley into the Northeast, required states to develop tougher emission controls for dozens of large coal-burning power plants.
The 22 states were to have submitted plans for the pollution reductions by last September, but those plans never materialized because of the lawsuit. The new controls are to be required by 2003 for some plants and 2005 for others.
The three-judge panel ruled Friday to uphold the regulation, meaning that the temporary stay issued in May was lifted.
"This decision means that we again can move forward to bring cleaner, healthier air to more than 138 million people living in the eastern half of the United States," EPA Administrator Carol Browner said in a statement.
Assistant Attorney General Lois J. Schiffer said the court decision was important "because air pollution knows no boundaries" and interstate travel of smog-causing chemicals needed to be controlled.
The lawsuit, filed by several Midwestern states and operators of coal-burning power plants in the Ohio Valley and Midwest, had challenged the way the EPA determined the source of the air pollution and how it considered the cost of pollution controls for the 22 states to which the regulation applied.
The court in both cases ruled that the EPA had acted properly as it applied to 19 states. The court, however, said further review was needed regarding the regulation's application to three other states -- Wisconsin, Missouri and Georgia.
Judges Stephen Williams and Judith Rogers voted to uphold the EPA regulation, while Judge David Sentelle dissented.
"This puts the agency on track to cut pollution from coal-fired power plants in the eastern half of the United States by over a million tons," said David Hawkins, an air quality expert at the Natural Resources Defense Council.
The EPA regulation, issued in October 1998, most significantly affects coal-burning power plants in the Ohio Valley and the Midwest.
Environmentalists and politicians in the Northeast for years have argued that these plants, which are allowed under federal law to comply with less stringent air pollution standards, spew out hundreds of thousands of tons of smog-causing chemicals that drift across state lines into the Northeast.
The EPA, after lengthy review, agreed with those complaits and issued the new regulation aimed at getting states with such plants to impose new controls that reduce smokestack emissions, especially nitrogen oxide, which is a component of smog.
While the regulation when issued applied to 22 states from Maine to Missouri, it would have the most severe impact on those states with the older power plants.
Utilities in the Ohio Valley and Midwest have argued that the long-distance pollution transfer problem has been exaggerated and that the Northeast's inability to meet federal air quality standards stems from urban automobile traffic and industrial pollution, not chemicals from power plants hundreds of miles away.