The ruling rejecting Cesare Battista's appeal will now be passed on to the Justice Ministry which will have to decide whether the 58-year-old Italian should be deported, a spokeswoman for the Brasilia court told AFP.
Battisti was convicted by an Italian court in 1993 and sentenced in absentia to life imprisonment for involvement in four murders in the 1970s when he was a left-wing activist. He denies committing those crimes.
"In theory, the law calls for any foreigner who entered Brazil with a false passport to be deported. Battisti himself admitted that the stamps on his passport were fake, hence the rejection of his appeal," the spokeswoman said.
"However he has been granted political asylum in Brazil. The court's decision will be relayed to the justice ministry which will have to rule," she added.
On February 2010, a Rio judge sentenced Battisti to a two-year detention in a minimum-security jail for use of a fake passport.
But on December 31 2010, just before leaving office, then president Luiz Inacio Lula da Silva granted him political asylum.
Battisti, a onetime member of the radical Armed Proletarians for Communism group, had been held for four years near Brasilia pending a decision on an Italian extradition request.
He was released in June 2011, hours after the Supreme Court rejected the extradition request, enraging Rome.
"Battisti's extradition was rejected by the Supreme Court but this (latest court) ruling could change things," the spokeswoman said.
She added that Battisti's lawyers could appeal.