In a 5-4 decision split along conservative and liberal lines, America's top court sided with 21 states and industry groups protesting standards imposed in 2012 that require power plants to cut toxic emissions.
The standards had been imposed by the national Environmental Protection Agency (EPA).
On the last day of its annual session, the Supreme Court said the EPA had "interpreted unreasonably when it deemed cost irrelevant to the decision to regulate power plants."
The standards were adopted in 2012 and were to have taken effect this year, requiring coal or oil-burning plants to drastically reduce their mercury emissions.
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The pollutant is considered especially toxic to children and pregnant women.
The Supreme Court ruling is a blow to the Obama administration and comes on the heels of two historic rulings last week that supported progressive causes -- legalizing gay marriage across America and upholding President Barack Obama's health care overhaul.
Republicans, who spent recent days blasting the Supreme Court over the decisions, were relatively muted after the mercury ruling.
The challengers of the regulation included 21 states led by Michigan, a coalition of power plants and the US National Mining Association.