The ruling applies to the nation's 900 or so Planned Parenthood clinics and their doctors, who perform roughly half of all abortions in the United States.
U.S. District Judge Phyllis Hamilton's ruling Tuesday came in one of three lawsuits challenging the legislation President Bush signed last year.
"The act poses an undue burden on a woman's right to choose an abortion," she wrote.
Federal judges in New York and Nebraska also heard challenges to the law earlier this year but have yet to rule. All three judges had temporarily blocked the law's implementation while considering the cases.
President Bush signed the bill in November, saying "a terrible form of violence has been directed against children who are inches from birth while the law looked the other way."
In the banned procedure — known as intact dilation and extraction to doctors, but called partial-birth abortion by opponents — the living fetus is partially removed from the womb, and its skull is punctured or crushed.
Justice Department attorneys argued that the procedure is inhumane, causes pain to the fetus, and is never medically necessary.
Abortion proponents argued that a woman's health during an abortion is more important than how the fetus is terminated, and that the banned method is often a safer solution that a conventional abortion, in which the fetus is dismembered in the womb and then removed in pieces.
The measure, which President Clinton had twice vetoed, was seen by abortion rights activists as a fundamental departure from the Supreme Court's precedent in Roe v. Wade. It shifted the debate from a woman's right to choose and focused on the plight of the fetus.
Abortion rights advocates said the law was the government's first step toward outlawing abortion. Violating the law carries a two-year prison term.
Late last year, Hamilton, a Clinton appointee, and federal judges in New York and Lincoln, Neb., blocked the act from being enforced pending the outcome of the court challenges. They began hearing testimony March 29.
Doctors have construed the Supreme Court's decision in Roe. v. Wade to mean they can perform abortions usually until the 24th to 28th week after conception, or until the "point of viability," when a healthy fetus is thought to be able to survive outside the womb. Generally, abortions after the "point of viability" are performed only to preserve the mother's health.
Doctors at about 900 abortion clinics practice under the Planned Parenthood umbrella, performing about half the nation's 1.3 million annual abortions.
The Nebraska and New York cases are expected to conclude within weeks. The outcomes, which may conflict with one another, will almost certainly be appealed to the Supreme Court.
The New York case was brought by the National Abortion Federation, which represents nearly half the nation's abortion providers. The Nebraska case was brought by a few abortion doctors.
"This doesn't automatically apply nationwide, but obviously its an important victory for opponents of the ban and defeat for supporters of the law," CBS News legal analyst Andrew Cohen said.
"This ruling shouldn't come as a surprise to supporters of the ban, who were told by some legal experts that the law was worded too much like an earlier ban that was struck down by the Supreme Court," Cohen said.
The Supreme Court in 2000 overturned a Nebraska partial-birth abortion law because it did not allow the banned procedure even when a doctor believes the method is the best way to preserve the woman's health.
To get around that decision, Congress simply declared that the procedure is never medically necessary — and during weeks of testimony, doctors testifying for the government stressed that same point — claiming that there are better alternatives to the method, and that it may even be harmful to women.
Witnesses for the abortion providers, however, testified in all three trials that the banned method is often preferred and sometimes necessary to preserve a woman's health.
Congressional sponsors said the ban would outlaw only 2,200 or so abortions a year. But abortion providers testified the banned method can happen even at times when doctors try to avoid it, such as when they attempt to remove the fetus from the womb in pieces.
Because of the possibility that the fetus may partially exit a woman during an otherwise legal procedure, abortion rights advocates said the law could ban almost all second-trimester abortions, which account for about 10 percent of all abortions in the United States.
Opponents of the ban also say that while it makes an exception for cases where the life of a mother is threatened by physical illness or injury, there is no allowance for risk to the health of the mother, or for mental illnesses.