The Constitutional Court threw out a suit by one resident who had argued that the Garzweiler II mine near the town of Mönchengladbach in North Rhine-Westphalia is not indispensable for Germany's power supply.
The Garzweiler II mine is to measure a staggering 48 square kilometres (19 square miles), slightly smaller than the area of Manhattan.
It is believed to hold 1.3 billion tonnes of lignite or brown coal, to be extracted by energy company RWE over the next three decades and which will belch 1.2 billion tonnes of the greenhouse gas carbon dioxide into the air when burned.
Garzweiler II is an expansion of an existing mine which, taken together, would cover 112 square kilometres. Work on the extension began in 2006.
Around 7,600 people will be asked to move to accommodate the gigantic project in North Rhine-Westphalia, Germany's most populous state, which comes as the country steps up the use of coal to compensate for a complete phase-out of nuclear power.
While the Constitutional Court upheld the legality of the Garzweiler II mine, the judges nevertheless awarded homeowners and residents greater rights for their cases to be heard in future.
The private interests of residents must be taken more into account in future when authorisations for such projects are considered and awarded, the court ruled.
The ruling is likely to make it more difficult for potential producers of shale gas – in a controversial process known as fracking – in Germany.
Fracking consists of pumping water and chemicals at high pressure into deep rock formations to free oil and gas, but environmentalists warn the process can contaminate ground water.
It is currently not used in Germany.