President Michelle Bachelet and women's rights groups hailed the top court's decision. Abortions will be allowed in cases of rape, risk to a mother's life and signs of fetal birth defect.
Chile's Constitutional Court on Monday ruled that a law passed by Congress easing abortion restrictions in some cases is legal.
The court's 6-4 vote paves the way for Socialist President Michelle Bachelet to sign the legislation into law.
"Today, women have won, democracy has won, all of Chile has won," said Bachelet, a physician and former head of UN Women, the UN entity for Gender Equality and the Empowerment of Women.
Abortion is currently banned in the conservative Roman Catholic country and can be punished by up to five years in prison.
Abortion in limited cases
Under the changes, abortion will be allowed in cases of rape, risk to a mother's life and if the fetus shows signs of having a birth defect.
The laws end Chile's status as the last country in South America to have a full ban on abortion.
After an uphill fight, Chile's upper house passed the new abortion laws in July, followed by the lower house in August.
Conservative lawmakers then challenged the new laws at the highest court.
The Constitutional Court's decision cannot be appealed.
Victory of women
"This victory is testament to the work of millions of women across the Americas and the world who fight against draconian laws that punish women and push them to seeking clandestine and dangerous abortions, putting their health and lives at risk," said Erika Guevara-Rosas, Americas Director at Amnesty International.
Bachelet had pledged to reform abortion laws when she took office for the second time in 2014.
Supporters had hoped Bachelet could sign the new laws before the November presidential elections in which she is constitutionally barred from participating.
Chile's abortion ban came into effect in 1989 towards the end of the Augusto Pinochet dictatorship.
cw/jm (AP, Reuters)