Leyla Sahin, 32, claimed she was excluded from attending Istanbul University to undertake medical studies in 1998 because she insisted on wearing a Muslim veil.
Ms Sahin left the country to finish her studies in Austria, where she now lives.
She took her case before the European Court arguing Istanbul University breached Article 9 of the European Convention on Human Rights.
Article 9 enshrines the basic rights of freedom of thought, conscience and religion.
But the court ruled that the university’s headscarf ban did not breach these fundamental rights among the mostly Muslim population of the Turkish secular state.
In order to protect the rights and freedoms of all students and maintain public order against extremist elements “which sought to impose on society as a whole their religious symbols,” the court found the university had acted legitimately.
The court also pointed out that Istanbul University introduced the ban in 1994, “well before the student enrolled there.”
The judges’ decision upheld the court’s June 2004 ruling, in which it found the headscarf ban complied with Turkey’s right “protect the democratic system in Turkey.”
Such a definitive judgement in favour of Turkey’s ban is expected to set a precedent for 30 other similar cases reportedly pending from Turkish complainants.
It may also have a bearing elsewhere, for example in France, where the introduction of a ban on the wearing of religious symbols in public schools last year drew heated opposition.
Bitter debate has raged in Turkey over the controversial issue since the mid-1990s.
Constitutional court judgements following the forced resignation of Turkey’s first Islamist Prime Minister, Necmettin Erbakan, in 1997 led to tighter restrictions on the wearing of headscarves in universities.
Almost a decade later, divisions remain evident, with the nation’s foreign minister rejecting the latest ruling.
Abdullah Gul spoke out, denouncing the ban as undemocratic and expressed confidence that it would eventually be lifted.