The decision brings a likely end to months of wrangling between the nation's most vocal anti-bailout governor and legislators who accused him of playing politics with people's lives.
The Republican governor had refused to take the money designated for the state over the next two years, even after legislators passed a budget requiring him to do so. He became the first governor to defend in court his desire to reject money from Washington.
Educators had predicted hundreds of teachers would lose jobs and colleges would see steep tuition increases without the money, though sharp budget cuts will still take a toll.
The state Supreme Court's ruling came a day after arguments in two lawsuits filed by students and school administrators. Sanford had tried to get those cases merged in federal court with his lawsuit, which he filed moments after legislators overrode his budget veto. But he lost that battle Monday when a federal judge refused to take those cases.
Sanford anticipated Thursday's ruling. On Monday, the governor said he would not appeal the Supreme Court's decision and, if he lost, would drop his federal case.
Sanford has refused to request the $700 million -- the portion of the $2.8 billion bound for the state that he says he controls -- unless legislators agreed to offset state debt by an equal amount. The White House twice rejected that idea, noting the money must be used to help education and avoid job losses.
South Carolina, which had the nation's third-highest jobless rate in April -- hitting a state record high of 11.5 percent -- cut more than $1 billion from its $7 billion spending plan for 2008-09 as tax revenues slumped in the recession.
The stimulus fight has raised the national profile of Sanford, the chairman of the Republican Governors Association, and prompted talk of a 2012 GOP presidential bid.
Sanford's refusal has raise the ire of U.S. Rep. Jim Clyburn, the No. 3 House Democrat, who accused the governor of being a foe of public education. Amid budget cuts and uncertainty over the federal money, districts had told hundreds of teachers they don't have a job in the upcoming school year.
State education officials estimated schools would eliminate 2,600 education jobs, including 1,500 teachers, without the stimulus money.
Clyburn, D-S.C., inserted an amendment in the federal law with Sanford's anti-bailout stance in mind, saying legislators could go around a governor's refusal. But the legality of that was later questioned.
But on Monday, U.S. District Judge Anderson cited Clyburn's amendment in saying it was clear Congress intended to allow legislators to get around governors who didn't want the money.