The justices found 6-2 that a lower court did not have the authority to set aside the measure approved in a 2006 referendum supported by 58% of voters.
It bars publicly funded colleges from granting "preferential treatment to any individual or group on the basis of race, sex, color, ethnicity or national origin."
Justice Sonia Sotomayor, the court's first Latina, reacted sharply to the decision.
"For members of historically marginalized groups, which rely on the federal courts to protect their constitutional rights, the decision can hardly bolster hope for a vision of democracy that preserves for all the right to participate meaningfully and equally in self-government," Sotomayor wrote.
But three justices in the majority, Chief Justice John Roberts, Anthony Kennedy and Samuel Alito. concluded that the lower court did not have the authority to set aside the law.
"This case is not about how the debate about racial preferences should be resolved. It is about who may resolve it," Kennedy wrote.
Justices Antonin Scalia, Stephen Breyer and Clarence Thomas voted in the majority as part of concurring opinions.
Sotomayor and Ruth Bader Ginsburg dissented, and Justice Elena Kagan took no part in the case.
The decision was the latest step in a legal and political battle over whether state colleges can use race and gender as a factor in choosing what students to admit.
The debate in recent years has centered around whether and when affirmative action programs -- while constitutionally permissible now -- would eventually have to be phased out as the goal of obtaining diversity is met.
Last year, the court affirmed the use of race at the University of Texas, but made it harder for institutions to justify such policies to achieve diversity.
In that dispute, a white student said the college's existing affirmative action policy violated her "equal protection" rights. Civil rights supporters of such programs claim Michigan's ban also has the same effect, and a federal appeals court agreed.
The Supreme Court ruled in 2003 that while state universities could use race as a factor in choosing which students to admit, they could not make race the determining factor in deciding whether applicants are accepted.
Michigan has said minority enrollment at its flagship university, the University of Michigan, has not gone down since the measure was passed.
Civil rights groups dispute those figures and say other states have seen fewer African-American and Hispanic students attending highly competitive schools, especially in graduate level fields like law, medicine, and science.
The Michigan ban also prohibits the state from considering race and gender in public hiring and public contracting decisions. But the current high court case dealt only with the college admissions portion.
Efforts over decades to create a diverse classroom have been controversial.
The Brown v. Board of Education high court ruling in 1954 ended segregation of public schools, but sparked nationwide protests and disobedience by states that initially refused to integrate.
In the 1978 Bakke case, the justices ruled universities have a compelling state interest in promoting diversity, and that allows for the use of affirmative action. That issue involved a discrimination claim by a white man denied admission to law school.
The referendum issue has been around at least since 1996, when California voters endorsed Proposition 209, which bans use of race, sex, or ethnic background by state agencies in areas of education, and government hiring and contracts.
Six other states now have similar laws, and others may follow suit.
Roberts has made the issue a key part of the court's docket in recent years and it could serve as a major legacy of the current conservative majority.
(Bill Mears, CNN Supreme Court Producer)
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