The judges ruled by a slim majority of eight to seven to throw out the law.
The bill, passed in July last year, stripped the Supreme Court of its power to declare government decisions unreasonable and generally weakened the judiciary.
The Knesset, Israel's parliament, amended the Basic Law of Israel on July 24 with a majority of 64 votes in favor, enacting the legislation into law.
Israel’s ruling coalition objected to Monday’s ruling, with Justice Minister Yariv Levin saying it opposes the "spirit of unity" required in time of war.
The country’s opposition parties expressed support for the decision, with opposition leader Yair Lapid saying the court has his full backing in "its role in protecting the citizens of Israel."