The justices on Friday voted 5-4 to overturn a decision by a lower court in California that barred the Trump administration from employing the money for a purpose other than that designated by Congress.
The wall, dividing the US and Mexico, was Trump's major campaign promise during the 2016 presidential election. It is fiercely opposed by Democrats.
In a tweet, Trump described the ruling as a "big victory". He has argued that a new wall would help to curb illegal immigration, which he says is fuelling crime and placing a strain on the economy.
Democrats, however, say that Trump has "manufactured the border emergency" and that the wall has become a symbol of his anti-immigration platform.
Trump resorted to tapping funds from the Defence Department funds after failing to persuade Congress to appropriate more money for the wall in a standoff that led to a 35-day-long partial shutdown of the federal government.
On February 15, he declared a national emergency on the border to justify the diversion of funds.
The Democratic-controlled House of Representatives voted to block the emergency declaration and the Senate, where Trump's Republicans are in the majority, followed suit, but the President vetoed the legislation and the White House announced plans to spend $8 billion on the wall.
That sum would include just under $1.38 billion from a Homeland Security appropriations bill that Congress passed on February 14 to avert a new government shutdown, while the remaining $6.6 billion in funds was to be shifted from other programmes through a combination of executive actions and the national emergency declaration.
The American Civil Liberties Union (ACLU) filed suit against the administration on behalf of the environmental group Sierra Club and the Southern Border Communities Coalition, which represents organisations from San Diego to southeastern Texas.
Environmental groups say building the wall can have a negative impact on wildlife. About 20 states also filed lawsuits to stop the President from using the emergency declaration to bypass Congress, the US media reported.
The federal district court in California sided with the plaintiffs, finding that the public interest was "best served by respecting the Constitution's assignment of the power of the purse to Congress, and by deferring to Congress' understanding of the public interest as reflected in its repeated denial of more funding for border barrier construction".
The Trump administration challenged the decision, which was upheld by a panel the US Court of Appeals for the 9th Circuit, based in San Francisco.
The White House then appealed to the Supreme Court, insisting that the district court misinterpreted the law.
US House Speaker Nancy Pelosi called the apex court ruling "deeply flawed".
The ACLU, meanwhile, vowed to seek an expedited decision from the Ninth Circuit Court of Appeals "to halt the irreversible and imminent damage from Trump's border wall".
( With inputs from IANS )