The 5-2 opinion struck down the Opportunity Scholarship Program, championed by Gov. Jeb Bush, which was the nation's first statewide system of school vouchers.
Under the 1999 law, students at public schools that earn a failing grade from the state in two out of four years were eligible for vouchers to attend private schools.
Judges had allowed the state to continue the program while the case was on appeal, and about 700 children are attending private or parochial schools through the program.
About 24,000 more attend such schools under more recently created programs, including one for children with disabilities. Thursday's ruling did not directly affect those programs but could eventually be cited as a precedent.
Chief Justice Barbara Pariente, writing for the majority of the court, said the Opportunity Scholarship Program "diverts public dollars into separate private systems parallel to and in competition with the free public schools," which are the sole means set out in the state constitution for educating Florida children.
Private schools also are not uniform when compared with each other or the public system, and are exempt from many standards imposed by law on public schools, such as mandatory testing, she added.
The 1st District Court of Appeal had ruled that the system violated the separation of church and state in the Florida Constitution, but the state Supreme Court did not address that issue.
At a hearing last June, Barry Richard, representing the state, told the court that lawmakers have the "quintessential power" to spend state money as they see fit, including spending it on private school vouchers.
Voucher opponents argued that the program unconstitutionally diverted money from public to private schools, and that it violated the separation of church and state.
The U.S. Department of Justice was among those filing friend-of-the-court briefs in support the state. Supporters of voucher opponents included the Florida Education Association, the Florida PTA, the National Association for the Advancement of Colored People and the League of Women Voters.
Two more recent voucher programs dwarf the "opportunity scholarships." Nearly 14,000 students attend private schools on state-funded McKay scholarships, which was created for children with disabilities. An additional 10,000 poor children attend private schools on scholarships funded by businesses that get tax credits from the state.