The ruling follows months of political deadlock. Anti-government protesters have been trying to oust Ms Yingluck since November 2013.
The move is likely to trigger protests by supporters of the government, which remains very popular in rural areas.
Ms Yingluck had been accused of improperly transferring Thawil Pliensri, her national security chief appointed by the opposition-led administration, in 2011.
Appearing court on Tuesday, she had rejected the suggestion that her party had benefited from the move - but the court ruled against her.
Continue reading the main story Sep 2006: Army ousts Thaksin ShinawatraDec 2007: Pro-Thaksin party wins electionAug 2008: Thaksin flees ThailandDec 2008: Huge anti-Thaksin protests; court bans ruling party; Abhisit Vejjajiva comes to powerMar-May 2010: Huge pro-Thaksin protests; more than 90 killed over 10-week periodJul 2011: Yingluck Shinawatra elected PMNov 2013: Anti-government protestsFeb 2014: Snap election held, but protesters disrupt polls; court rules polls invalid"The prime minister's status has ended, Yingluck can no longer stay in her position acting as caretaker prime minister," a judge said in a statement.It is not yet clear whether one of Ms Yingluck's ministers can step in or whether Thailand now faces a political vacuum.
Power struggleAnti-government protests began in the Thai capital late last year, with demonstrators blockading several parts of the city.
In response, Ms Yingluck called a snap general election in February that her party was widely expected to win. But the protesters disrupted the polls and the election was later annulled.
Ms Yingluck's supporters believe that the courts are biased against her and side with the urban elite at the heart of the protest movement.
Thailand has faced a power struggle since Ms Yingluck's brother, Thaksin Shinawatra, was ousted by the military as prime minister in a 2006 coup.
Mr Thaksin and his family are hated by an urban and middle-class elite who accuse them of corruption and abuse of power.
But Mr Thaksin's policies won him huge support in rural areas, and both the elections since the coup have returned Thaksin-allied governments to power.