The court upheld a sentence for tax fraud of four years in prison of which three are covered by an amnesty, even though Berlusconi is certain to be granted community service or house arrest instead.
Berlusconi's lawyers condemned the sentence as "unjust" and said they were looking into a possible further appeal to the European Court of Human Rights.
Prime Minister Enrico Letta called for calm and said decisions by the judiciary should be "respected".
"For the good of the country, a climate of serenity is required," Letta said in a statement.
The conditions of Berlusconi's sentence are still to be determined but experts say he may need permission from prosecutors to carry out political activities.
In any case the Senate will have to vote to lift Berlusconi's immunity before the sentence can be implemented – a process that could take months.
A roar went up from a small group of anti-Berlusconi campaigners gathered outside the courtroom in central Rome as news of the ruling filtered through.
One elated activist uncorked a bottle of champagne and held up an image showing the scandal-tainted magnate behind bars reading: "This is how we want Berlusconi".
At a rally of Berlusconi supporters near his luxury residence in another part of Rome, activists lowered their flags and ceased chants of "Silvio, Silvio!"
The road in front of the palace, where Berlusconi huddled with close family members, lawyers and political allies, was blocked off by dozens of police officers after warnings of more protests.
Berlusconi said earlier that there should be no effect on the government even if he is convicted.
"The sentence does not give serenity to our country, which absolutely needs political stability and national reconciliation," said Sandro Bondi, a senator from Berlusconi's People of Freedom party.
"The more responsible political forces and the institutions that are most aware of the gravity of the situation will have to ensure Italy does not plunge into a dangerous blind alley," he said.
Berlusconi lawmakers threatened ahead of the verdict to resign from parliament – a move that could trigger fresh elections – and had even said they could stage sit-ins to block the country's motorways.
The current government was installed this year following a two-month deadlock between Berlusconi's coalition and a leftist grouping led by the Democratic Party after close-run elections in February.
"Berlusconi is dead," said Beppe Grillo, leader of the anti-establishment Five Star Movement party.
"His conviction is like the fall of the Berlin Wall in 1989," the firebrand leader wrote in a blog.
Guglielmo Epifani, leader of the centre-left Democratic Party, said the sentence should be "respected, executed and implemented".
President Giorgio Napolitano also urged "trust and respect" for the decision by the supreme court.
The court also said it was sending back to the court of appeals another part of Berlusconi's sentence which would have condemned the 76-year-old three-time prime minister to a temporary ban from parliament.
"The court annuls the sentence of interdiction from public office and…declares irrevocable all other parts of the sentence," judge Antonio Esposito said.
The case revolved around Berlusconi's business empire Mediaset – the starting point for his first foray into politics in the early 1990s.
His tumultuous career has been constantly dogged by legal troubles which he says are politically motivated attacks by left-wing prosecutors.
Thursday's verdict was Berlusconi's second and final appeal in the case, which first went to trial in 2006.
He is also appealing convictions in other cases for having sex with an underage prostitute, abusing his prime ministerial powers and leaking a police wiretap to damage a political rival.
Prosecutors have also filed charges alleging he bribed a senator to join his ranks in a move that helped bring down the government in 2008. Berlusconi has repeatedly been written off and bounced back in the past.
After being dramatically ousted from power in 2011 in a blaze of sex scandals and financial panic, he re-emerged with a powerful election campaign this year that won him a third of the vote.