The court ruled that the damages award to hundreds of thousands of smokers was "excessive" under the law.
The decision by the state's highest court is a major victory for tobacco companies which could have been compelled to make the payments to as many as 700,000 sick smokers in Florida.
The Florida judges agreed with the appeals court that the case was not a valid class action and said the punitive damages award was inappropriate.
The justices said the amount of the damages, the biggest against US tobacco companies in history, was clearly excessive and would bankrupt some of the defendants.
However the court agreed to reinstate compensatory damages of US$2.85 million (A$3.8 million) to Mary Farnan and US$4.02 million (A$5.4 million) to Angie Della Vecchia, two individuals who developed cancer and were plaintiffs in the initial lawsuit.
An appellate panel in 2003 overturned a 2000 decision ordering tobacco companies, including Altria's Philip Morris USA and RJ Reynolds Tobacco Holdings, to compensate hundreds of thousands of sick smokers in Florida for misleading them about the risks of smoking.
The latest ruling lifts considerable uncertainty facing the industry, especially for Altria, which is seeking to spin off its Kraft Foods division. Altria shares surged six percent to US$77.76 (A$104.14).
"As numerous trial and appellate courts have held, tobacco cases cannot be treated as class actions because liability must ultimately be decided on a case-by-case basis. Today's Florida Supreme Court opinion is in line with those decisions," said Philip Morris’s vice president William Ohlemeyer.
Appeal possible
The jury in the so-called Engle class-action lawsuit had awarded US$12.7 million (A$17 million) in compensatory damages and US$145 billion (A$194 billion) in punitive damages.
The appellate court ruled that the jury was wrong in trying the case as a class-action lawsuit, saying it "presents a multitude of individualised issues."
It said, however, that the estimated 700,000 people included in the suit "may pursue their claims on an individual basis." The plaintiffs could appeal further to the US Supreme Court.
Anti-smoking campaigners said the Florida high court ruling was a disappointment for anti-smoking advocates but not a clear-cut victory for the industry.