Franco, whose Nationalist forces defeated the Republicans in the 1936-9 civil war, is entombed in a basilica in a giant hillside monument along with tens of thousands of people who died during the conflict and were transferred from other graves around the country.
Families of those killed in the civil war complain that the man who ruled as a fascist dictator for close to four decades should not lie in a monument to victims of the conflict that brought him to power.
Baltasar Garzon, a high-profile former judge turned lawyer and two colleagues made a formal request to the conservative government in 2015 to transfer his remains in an attempt to address a dark, recent past that still remains sensitive.
Receiving no reply, they took the matter to the Supreme Court.
The government did eventually respond last year, saying they should ask the Church to authorise an exhumation as Franco's remains are in a basilica.
On Tuesday, the court said it had "rejected the plea" as the government had already given its response.
Built by Franco's regime between 1940 and 1958 in the granite mountains of the Sierra de Guadarrama, the monument holds the remains of over 30,000 dead from both sides in the civil war.
Franco lies buried behind the high altar of a vast basilica hewn into the rock, which is capped by a huge cross that can be seen for miles around.
The dictator dedicated the site to "all the fallen" of the civil war in an attempt at reconciliation, but the monument was previously built in part by the forced labour of political prisoners, many of whom died during the works.
The Association for the Recovery of Historical Memory, a group seeking justice for people tortured, killed and disappeared in the civil war and the ensuing dictatorship, slammed the court decision.
"The remains of the dictator Francisco Franco will stay in the Valley of the Fallen, financed by public funds, in part by taxes paid by his victims," it said in a statement.
Meanwhile Garzon, his colleagues Manuel Olle and Eduardo Ranz said they may take the case to Spain's Constitutional Court and the European Court of Human Rights.