The decision came eight years after the initial announcement that famed architect Frank O. Gehry would design the landmark museum, and four years after a ground-breaking ceremony attended by Israeli and California dignitaries.
In the meantime, the estimated cost of the project has escalated from $120 million to $250 million. The Center already has raised $115 million for the project, according to Rabbi Marvin Hier, founder and dean of the Wiesenthal Center.
He said construction would resume immediately and praised the court's ruling, adding, "All citizens of Israel, Jews and non-Jews, are the real beneficiaries of this decision."
Hier estimated that the museum would open in about three-and-a-half years.
Following Gehry's design, the new complex will consist of a general museum and a children's museum, a theater, conference center, library, gallery and lecture halls, with the mission to promote civility and respect among different segments of the Jewish community and between people of all faiths.
The museum site, adjoining Independence Park, served as Jerusalem's main Muslim cemetery until 1948. Muslim authorities appealed to Israel's Supreme Court that museum construction would desecrate the cemetery, which allegedly contained the bones of Muslims killed during the Crusades of the 12th and 13th centuries.
Attorneys for the Wiesenthal Center countered that the site housed a four-story underground garage for three decades, and before that the old Palace Hotel, and that Muslim religious authorities had ruled earlier that the location had lost its sacred character.
In an 85-page decision, a three-judge panel of the Supreme Court agreed with the Wiesenthal Center argument.
Other objections had been raised by some Israeli politicians and initially by Yad Vashem, Israel's Memorial Holocaust Authority. Hier assured Yad Vashem that the new museum would not deal with the history of the Holocaust.
Throughout the lengthy proceedings, the project had the unstinting support of Ehud Olmert as mayor of Jerusalem and later prime minister of Israel.
The Supreme Court decision drew immediate objections from Gershon Baskin, a longtime Israeli opponent of the project because of its Muslim cemetery connection.
Baskin, co-CEO of the Israel/Palestine Center for Research and Information, called for letters of protest from all "Jerusalemnites, rabbis, Israelis, Palestinians, Jews and citizens of the world."
Artist's rendering of the project