The nation's top court ruled 6-3 in favor of New Jersey, the eastern state that has lobbied for years for the right to allow sports betting.
The court declared unconstitutional a 1992 federal law which banned wagering on professional and university sports except in four states where the market was already in place - Nevada, Delaware, Montana and Oregon.
Congress had enacted the legislation - championed by then US senator Bill Bradley, a Democrat and former star basketball player for the New York Knicks - on the grounds that gambling would threaten the integrity of sporting events.
In its opinion, the high court said the US Congress reserves the right to regulate sports gambling directly, "but if it elects not to do so, each state is free to act on its own."
The ruling, which eliminates Nevada's near-stranglehold on sports betting in the United States, is expected to lead to a rush by state legislatures to authorize sports wagering in a bid to reap tax revenue.
Former New Jersey governor Chris Christie, who had fought the law on behalf of the state's down-on-their-luck casinos in Atlantic City, welcomed the ruling.
"A great day for the rights of states and their people to make their own decisions," Christie said. "New Jersey citizens wanted sports gambling and the federal Gov't had no right to tell them no."
Two leading fantasy sports companies - FanDuel and DraftKings - immediately announced plans to branch out into sports wagering.
"In the same way we revolutionized fantasy sports, we will bring innovation to the sports betting space," FanDuel said in a statement.
DraftKings CEO Jason Robins said his company plans to "provide our customers with innovative online sports betting products.
"Today's Supreme Court ruling is welcome news to the millions of Americans who currently wager $150 billion illegally each year through off-shore, black market bookies," Robins said.
"States are now free to allow their residents to place mobile sports bets with licensed, trusted companies based in the US and that pay taxes here."
British bookmaker William Hill, which already takes bets in Nevada, said it also hoped to get in on the action.