Hours later, the American Civil Liberties Union said it would not appeal the ruling to the U.S. Supreme Court, removing the final legal roadblock to the election, now just two weeks away.
An ACLU spokesman said the group will keep its fingers crossed and hope that the election isn't decided by votes that are lost or miscounted.
The 11-member panel of the 9th U.S. Circuit Court of Appeals overturned a Sept. 15 decision of a three-judge panel from the same circuit.
The original panel postponed the election on whether to recall Gov. Gray Davis because six counties would use outdated punch-card ballots that were the subject of the "hanging chads" battle in Florida over the 2000 presidential election between George W. Bush and Al Gore.
But CBSNews.com Legal Analyst Andrew Cohen warns the recall race could still face more legal challenges.
"Assuming there is no attempt to appeal the ruling to the Supreme Court, the dispute now ends, at least until the election," Cohen says. "But the 9th Circuit certainly left open the possibility of a post-election claim should there be problems at the voting booths, and so the plaintiffs, who have lost this round, may find themselves back in court in just a few weeks."
The 9th Circuit judges reinstated a ruling by a district court judge who had refused to postpone the election. The judges based their decision on the state's constitution, not any precedent set by Bush v. Gore.
"The district court did not abuse its discretion in concluding that plaintiffs will suffer no hardship that outweighs the stake of the state of California and its citizens in having this election go forward as planned and as required by the California constitution," the ruling said.
Legal scholars had predicted the outcome. A day after the decision delaying the vote, the court announced it would revisit the case with 11 judges — a sign the court was not happy.
Davis, a Democrat, has been dogged by his handling of the state's ailing economy. Lt. Gov. Cruz Bustamante is running as a fallback Democratic candidate if voters oust Davis, and Republicans Arnold Schwarzenegger and state Sen. Tom McClintock are among 135 candidates also campaigning for Davis' job.
Some observers thought a delay in the recall vote would have benefited Davis by allowing voter anger over the state's problems to cool, and because many Democrats would be attracted to the polls for the presidential primary if the recall election were moved to March.
But even Davis has sounded fed up in recent days with the lengthy process, and his campaign cheered the court's decision Monday.
"We are ready to beat the recall on Oct. 7," Davis campaign spokesman Peter Ragone said Tuesday. "This recall has already cost enough in terms of public funds and time away from the public's business. It is time to move forward."
Schwarzenegger's campaign released a statement saying: "It is time for the legal wrangling to end. It is time for this election to go forward. It is time to let the people decide."
The 11 judges of the 9th Circuit heard oral arguments in the case Monday afternoon.
Lawyers for Secretary of State Kevin Shelley urged the panel to overturn the three-judge panel. They said the California constitution requires recall elections to be held no later than 80 days after enough signatures of registered voters are gathered. They also said the vote should go on because more than 600,000 absentee ballots had been turned in.
The counties whose voting machinery prompted the litigation are Los Angeles, Mendocino, Sacramento, San Diego, Santa Clara and Solano. They represent about 40 percent of the state's registered voters.
As the appeals court mulled its decision, the GOP congressman who bankrolled the recall effort urged either McClintock or Schwarzenegger to drop out.
Rep. Darrell Issa said Monday that if both leading Republican candidates remained on the ballot, he would urge voters to vote no on recalling Davis because a yes vote would assure a victory for Bustamante.
On Monday, a judge blocked Bustamante from using millions of dollars raised by an old campaign committee for his recall election bid, even if the money is spent on ads ostensibly opposing an initiative on the same ballot.
Sacramento County Judge Loren McMaster ordered the more than $4 million raised by Bustamante's campaign committee before voter-approved campaign spending limits were in place to be returned to that old account. From there, the money could be returned to donors.
Schwarzenegger, meanwhile, released two new statewide 30-second television ads, including one criticizing Bustamante and McClintock (without mentioning them by name) for taking tribal donations. The second criticizes Davis and supports the recall.
And Monday night, 90 lesser known candidates in the recall race took Jay Leno up on his offer to appear on "The Tonight Show."
"Welcome to California, now under the division of Ringling Bros., ladies and gentlemen," Leno said Monday as he welcomed the motley group to his 300-seat studio.