The judge overseeing the case, José Castro, made the ruling after the civil servant's union known as the Manos Limpias asked for Urdangarin — the husband of the eldest daughter of Spain's King Juan Carlos — to be stripped of his passport because he presented a flight risk.
Urdangarin and his former business partner Diego Torres are at the heart of a corruption investigation, opened at the end of 2011, focused on allegations of influence peddling and embezzlement.
The pair are suspected of overbilling regional governments to stage sports and tourism events, and then siphoning off money to the non-profit Nóos Institute, which Urdangarin chaired from 2004 to 2006.
Urdangarin had been under investigation for some time without the issue of his being able to travel coming up.
However, in early April the 45-year-old ex-Olympic handball player was invited to either help manage Qatar's national handball team or promote the sport in the oil and gas-rich Gulf state. This prompted the Manos Limpias union to ask Judge José Castro to strip Urdangarin of his passport.
But the judge refused on Thursday, saying that Urdangarin — who holds the title of the Duke of Palma — did not present a flight risk.
In a document outlining the reasons for this decision, the prosecutor Pedro Horrach said Urdangarin had not once failed to appear at a judicial hearing related to the Nóos Institute.
The prosecutor also stated that Urdangarin also had a permanent police escort which severly decreased the chances he would try and avoid judicial proceedings.
In early April, the court officially named Urdangarin's wife Cristina, the Duchess of Palma and the King's youngest daughter, as a suspect in the case after Manos Limpias asked it to do so.
This is the first time that a member of Spain's Royal Family has been directly implicated in judicial proceedings.
The Duchess of Palma has since appealed against her need to appear in court. The judge will decide on this matter in late May.