The Constitutional Council ruled that certain new obligations for internet platforms set out in the law – passed by parliament in May – were harmful to freedom of expression and communication.
Lawmakers will now have to agree changes to the law before it is submitted to President Emmanuel Macron for signing.
The Council ruled that certain parts of the law could “encourage operators of online platforms to withdraw content… whether or not it (the content) is manifestly illegal.”
It said that a 24-hour period to withdraw material or face a penalty was “particularly short”.
“The legislature has infringed freedom of expression and communication in a way which is not adapted, necessary or proportionate to the stated aim,” it added.
The law obliges platforms and search engines to remove offensive content – incitement to hate or violence and racist or religious bigotry – within 24 hours or risk a fine of up to €1.25 million.
An extension of Macron's vow to battle racism and anti-Semitism propagated via the internet, the bill was first submitted to parliament over a year ago.
It has since been amended several times in response to criticism and comments, including from the European Commission which demanded a clearer definition of what kind of content would be criminalised.
It has drawn criticism from watchdog bodies in France that have expressed concerns over potential violations of the right to freely express oneself on the world wide web.
And digital companies are worried about fines or legal battles that may result from the new onus placed on them to determine what content violates the bill, and then withdraw it within the given timeframe.
The French right had staunchly opposed the law and used its control of the upper house Senate to register its objections while the legislation was going through parliament.
“Only the title of the law appears to have been deemed constitutional,” Bruno Retailleau, the head of the right-wing The Republicans party in the Senate wrote with heavy sarcasm on Twitter.
“All those who care about freedom must celebrate this,” he said.