Judges decided it was wrong to ban cribs from the buildings for "cultural, artistic or festive" purposes, however it also ruled they should not be used to try and convert people.
Spokeswomen for the State Council, Aurélie Bretonneau, said the set designs had become "progressively disconnected" from Christianity and now only represent a "decorative element".
The controversy in France over whether nativity scenes can be staged in town halls erupted two years ago when a court in the western city in Nantes ruled a local town hall must take down its crib.
It decision, based on 1905 legislation protecting the separation of church and state, followed a complaint from secularists at the National Federation of Free Thought. Now, it's been reversed.
Speaking in 2014 Nadine Morano, a right-wing MP belonging to The Republicans, said: "Secularism must not kill our country, our roots and our traditions."
In another case involving the application of secularism laws, the State Council also recently overturned a ban by around 30 French seaside towns of the so-called burkini Islamic swimsuit.