The ruling, which cannot be appealed, prompted celebratory gunfire in the capital Tripoli where Islamist-led militias have been in control since August, an AFP correspondent reported.
The Tripoli court also nullified a constitutional amendment that led to elections on June 25, thereby invalidating the polls and all decisions that resulted from them.
The internationally supported government of Prime Minister Abdullah al-Thani is sheltering in the remote eastern town of Tobruk near the Egyptian border and has almost no control over Libya's three main cities.
"Lawmakers will not recognise a verdict decided under the gun," Tobruk-based parliamentarian Issam al-Jehani wrote on Facebook.
Libyan authorities have struggled to assert control across a country awash with weapons and powerful militias that ousted longtime autocratic leader Moamer Kadhafi in a 2011 revolt.
There was no immediate response to the ruling from the adminstration led by Thani, who was appointed prime minister in March by an interim parliament that has since been dissolved.
He submitted his resignation in August, but the elected parliament asked him to form a new government.
Abderrauf al-Manai, who with other Islamist lawmakers has boycotted the parliament's sessions in Tobruk, argued that the legislature was in breach of the constitution because it was sitting in neither Tripoli nor second city Benghazi.
He had also argued that the parliament had exceeded its authority in calling for foreign military intervention after the militia takeover of the capital.
"I hope all parties will respect the decision of the court," Manai told television broadcaster Al-Nabaa.
Most lawmakers who are boycotting the internationally recognised parliament support Fajr Libya, an Islamist-led militia alliance that has formed a parallel government known for its Islamist sympathies.
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