The ruling, which is expected to be appealed, also rejected the complainants' argument that Australia's law unjustifiably infringed tobacco trademarks and violated intellectual property rights.
The WTO case was seen as a test case for public health legislation globally, and could lead to tighter marketing rules for unhealthy foods and alcohol as well as tobacco.
"Tobacco plain packaging is an evidence-based measure that WHO recommends as part of a comprehensive approach to tobacco control," WTO spokesman Tarik Jasarevic said on Thursday.
"A positive decision from the WTO panel is likely to accelerate global implementation."
Australia's law goes much further than advertising bans and graphic health warnings seen in other countries.
Introduced in 2010, it bans logos and distinctively-coloured cigarette packaging in favour of drab olive packets that look more like military or prison issue, with brand names printed in small standardised fonts.
Cuba, Honduras, Dominican Republic and Indonesia complained at the WTO that the Australian rules constituted an illegal barrier to trade. Ukraine was also among the complainants but dropped out after a change of government in Kiev.
Tobacco firms have said the law infringes their trademarks and that the easily counterfeited packs will encourage smuggling, although they are not involved in the WTO case.
Tobacco giant Philip Morris declined to comment on Thursday as it is not party to the dispute.
Vera Luiza da Costa e Silva, head of the secretariat of the WHO's Framework Convention on Tobacco Control, said it was a huge day for tobacco control. She cited the WTO ruling and noted that a protocol to halt tobacco smuggling had taken effect.
She also saw a "domino effect" in plain packaging, with other countries already moving towards Australian-style rules.
"What this shows in reality is that plain packaging is a reality. It will happen anyway, and parties will progressively adhere more to plain packaging," da Costa e Silva said.
Some countries were now discussing a tobacco "endgame", with less than five per cent of the population smoking, she said, adding: "Plain packaging is part of this path."
The expected appeal of the WTO ruling leaves the dispute's eventual outcome uncertain since the WTO may run out of judges next year due to U.S. President Donald Trump's veto on new judicial appointments.