The law, passed by a Republican-led legislature in November, requires at least 10 percent of a school district membership to sign a complaint which would be reviewed by the Department of Public Instruction, with hearings in front of an administrative law judge.
The use of race-based team names and mascots came under scrutiny this year with a campaign to pressure the National Football League's Washington Redskins to change their name.
During the last several years, school districts throughout the United States have changed their mascots and nicknames in response to a growing public sentiment against using depictions of Native Americans and minorities to promote sports teams.
The new law in Wisconsin repeals a measure passed by the then majority-Democrat legislature in 2010 and signed into law by former Democratic Governor Jim Doyle.
The former law, the first of its kind in the United States, set up a process that allowed a single school district resident opposed to a race-based mascot, nickname, logo or team name to file a complaint with the State Superintendent of Public Instruction, which would decide whether to take action against the district.
"Instead of trying to legislate free speech, a better alternative is to educate people about how certain phrases and symbols that are used as nicknames and mascots are offensive to many of our fellow citizens," Walker said in a statement.
The new law also places the burden on those who file a complaint to prove that a race-based mascot or team name promotes discrimination, pupil harassment or stereotyping. Under the old law, the burden of proof was on the school district.
School districts that refused to follow state-ordered changes could have faced daily fines of up to $1,000.
"It's teaching children in public schools, of all places, how to stereotype along racial lines," said Barbara Munson, chairwoman of the Wisconsin Indian Education Association Indian Mascot and Logo Taskforce.
Thirty of Wisconsin's 424 school districts have mascots and names depicting Native Americans. Since 1991, 35 Wisconsin school districts have changed their mascots, Munson said.
The new law voids orders for three school districts to change their mascots and team names. One of those school districts has already made changes.
Walker's signing of the law comes a week after the Houston school board gave preliminary approval to a policy to stop using mascot names such as "Redskins."
In California, Coachella Valley High School, where sports teams are known as the "Arabs" has come under fire from an Arab-American rights group that says its mascot is an offensive caricature.
(Reporting By Brendan O'Brien; Editing by Jonathan Oatis)
