The ban was imposed after a New Delhi-based private research group alleged the soft drinks contained high levels of pesticides.
However, Kerala's top elected official vowed to re-impose the ban.
"The court's verdict quashing the Kerala government's order is unfortunate and the government is exploring legal steps to take corrective measures to reinforce the ban," Chief Minister V.S. Achuthanandan told reporters.
State Health Minister P.K. Sreemathi said the government would challenge Friday's verdict in India's Supreme Court.
The High Court upheld the argument by Coke and Pepsi that Kerala had no jurisdiction to impose a ban on the manufacture and sale of their products. Only the federal government can ban food products, it ruled.
The court also said the state government did not give any time to the cola companies to submit their arguments before banning their products.
Coca-Cola India lauded the decision.
"We are gratified that High Court of Kerala has set aside the illegal order," the company said in a statement. "Coca-Cola India has always been completely confident of the safety of its soft drinks in India."
PepsiCo said the ruling validates its belief in the quality of its products. "PepsiCo products in India comply with the most stringent Indian and international regulation," it said in a statement.
The Kerala ban was the harshest in India, where seven of the country's 28 states imposed partial or complete bans on Coke, Pepsi, Sprite and other drinks from the companies after the Center for Science and Environment made the pesticide allegations on Aug. 3. More than 10,000 schools also have banned the beverages.
Coca-Cola said it hoped other states would reconsider their positions after Friday's ruling, adding that the ban affected thousands of workers and retailers.
Although many food products in India contain harmful pesticides, the Center for Science and Environment said it focused on Coca Cola and PepsiCo because they account for nearly 80 percent of India's $2 billion soft drink market.
The federal government had no immediate comment on the court ruling.