The National Guard plan, approved by the ruling party-controlled Congress last September, alarmed Lopez Obrador's opponents and human rights campaigners, who said it handed too much power to the armed forces.
By eight votes to three, the Supreme Court annulled the legislative reform granting the defense ministry operational and administrative control of the National Guard, concluding that it was unconstitutional.
Before coming to power in 2018, Lopez Obrador had vowed to send the military back to the barracks.
But under his presidency, the armed forces have kept their role in tackling cartel-related violence and even gained more responsibility, including control of ports and customs and major infrastructure projects.
Lopez Obrador created the National Guard in 2019 with a civilian command to replace federal police accused of corruption and human rights violations.
He has since argued that the military is less likely to be infiltrated by organized crime than other branches of the security forces.
The United Nations Office of the High Commissioner for Human Rights last year described the National Guard reform as a "setback to public security grounded in human rights."
Nada Al-Nashif, then acting UN high commissioner for human rights, said at the time that the changes "effectively leave Mexico without a federal civilian police force, further cementing the already prominent role of the armed forces in public security in Mexico."
The military's increased role had led to more allegations of human rights violations by law enforcement and the armed forces, and no sustainable reduction in crime, she said.
More than 350,000 people have been killed in a spiral of bloodshed since the government of then-president Felipe Calderon controversially deployed the army to fight drug cartels in 2006.
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