In an 8-3 decision, the judges yesterday annulled an opposition-dominated impeachment commission established by secret ballot in the lower house last week and ordered the procedure be restarted in an open vote.
It also gave the final word on whether to open an impeachment trial to the Senate, where Rousseff has greater support.
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The 68-year-old leftist maintains the budgeting maneuvers were accepted practice.
Under the court's ruling, a new commission to decide whether or not to impeach her must now be created in an open vote by the lower house.
If the commission recommends impeachment, the decision will then pass to the full lower house -- and then, the judges ruled, to the Senate.
The march towards the unpopular president's possible ouster was stalled by her allies in Congress, who say opposition legislators violated the constitution in their rush toward impeachment.
They claimed the impeachment commission illegally insisted on secret votes while picking its members, and that it was stacked with Rousseff's opponents.
On December 8 the Supreme Court ordered the commission to freeze its work until the challenge was resolved.
The speaker of the lower house, Eduardo Cunha, oversaw the controversial session to form the commission and is an architect of the impeachment drive.
Cunha himself has been charged with taking millions of dollars in bribes.
The political crisis and a separate corruption scandal involving state oil giant Petrobras have exacerbated the malaise gripping Brazil, whose economy, the world's seventh largest, is mired in a deep recession.
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