The 10-member Constitutional Council, which vets new laws, rejected an argument by the opposition Socialists that the First Employment
Contract (CPE) breached France's 1958 constitution.
Mr Chirac is the last obstacle to the law being approved but he is expected to risk the public fury it has generated.
The President’s seal of approval would open the way for the measure to become official.
The 73-year-old president is to make a televised address on Friday evening to announce his decision, sweetening it with an offer of round-table talks with the alliance of unions and student groups that has organised the opposition.
The struggle over the CPE, a contract which makes it easier to hire and fire young people, has turned into one of the most serious crises of Mr Chirac's 11-year presidency.
The ensuing protests have left Mr Chirac’s friend and ally Prime Minister Dominique de Villepin fighting for his political life.
More protests planned
Three weeks of escalating strikes and demonstrations reached a high on Tuesday when more than a million people joined one of the biggest nationwide protests in recent French history. Another day of action is planned for next Tuesday.
In order to dampen opposition anger, Mr Chirac will offer top-level negotiations similar to the ones that helped end the May 1968 student uprising and worker strikes.
If these talks produced proposals for youth employment which could replace the CPE, then Mr Chirac may make a commitment to implement them.
But unions and students want Mr Chirac to use his powers to send the CPE back to parliament, effectively killing it.
Socialist leader Francois Hollande has warned Mr Chirac that he would be entering into a "trial of strength" if he signed the CPE into law.
"If the president's idea is to force (the CPE) through, promulgate the law and then open dialogue, that's what we've been refusing for the last two months," said Francois Chereque of the CFDT union.
Bernard Thibault, head of the CGT, France's largest union, warned that if Mr Chirac promulgated the bill, it would "torpedo all possibility of discussions" and "aggravate the crisis."
Bruno Julliard, head of the main student union behind the protests, said it was now up to Mr Chirac "to respond to the expectations of a large majority of the population and to force the government to withdraw."
Student groups maintained the pressure on Thursday with wildcat actions across the country, blocking major highways such as the Paris ring road and invading the tracks at railway stations including the capital's Gare de Lyon.
Further widespread disruption is predicted for next Tuesday, with several transport unions saying they will join the strikes. The latest were eight unions from Air France.