The country's High Court has found that the decision to forcibly repatriate Somali refugees is unconstitutional and violates international law.
The sprawling Dadaab camp was scheduled to close in May.
It currently houses up to 350,000 people, mainly fleeing the unrest in Somalia.
The Kenyan government argues the camp is a recruiting ground for militant group Al Shabaab, and says it's in the country's security interest to shut it down.
But the country's High Court disagrees, with a judge calling the order discriminatory and against Kenya's constitution.
High Court magistrate John Mativo says it also violates international treaties that protect refugees from being returned to a conflict zone.
"A declaration that the decision by the government of Kenya to collectively repatriate all refugees in the Dadaab refugee camp to the frontiers of their country of origin against their will violates the principle of non-refoulement."
Rights groups have welcomed the ruling.
Amnesty International's Michelle Kagari says the government did not handle the matter well.
"The way the Kenya government went about dealing with their concerns with regards to security contravened the standards that are supposed to be followed where they are concerned that someone may no longer qualify for refugee status."
Medical charity Médecins Sans Frontières has also welcomed the court's decision.
MSF's Lisbeth Albrecht says the closing the camp would have put thousands of people at risk.
"We, as a medical humanitarian organisation definitely stated that that could have put the lives of thousands of refugees at stake. We expressed our concerns espcially for the most vulnerable populations. Refugees with chronic disease, but even pregnant women. Stating that the basic services in some parts of Somalia are not prepared yet, are not in place yet."
But government spokesman Eric Kiraithe says it will appeal the decision.
"The situation which forced this decision, after over a quarter of a century, the situation remains the same and nothing has changed. And therefore, being a government whose cardinal responsibility is first to Kenyans, we feel that this decision should be reviewed and that is why we are appealing."
Dadaab was once the largest refugee camp in the world.
At its peak, as Somalis fled conflict and famine in 2011, Dadaab's population increased to about 580,000.
The government originally wanted to close Dadaab last November, but delayed the closure amid international pressure to give residents more time to find new homes.
