Patrick Stuebing had a consensual sexual relationship with his sister after they first met when he was in his 20s and she was a teenager. They had four children, two of whom are disabled, the court said.
Stuebing lodged his case with the European Court of Human Rights after being sent to prison in November 2005 by a Leipzig court and losing subsequent appeals against his conviction for incest.
But the court ruled Thursday that the German authorities had the right to ban incest.
In convicting Stuebing, the German Federal Constitutional Court had "considered that sexual relationships between siblings could seriously damage family structures and, as a consequence, society as a whole," the court ruled.
Stuebing, who was born in 1976 and lives in Leipzig, was adopted and grew up with no contact with his birth family after the age of seven, according to a court statement.
When he reestablished contact with his birth family in 2000, he met his sister Susan, eight years younger than him and then aged 16.
Their relationship intensified after the death of their mother, the court said, and from January 2001 they "had consensual sexual intercourse and lived together for several years."
Their four children were born between 2001 and 2005.
Speaking to CNN's Frederick Pleitgen in 2007, Stuebing explained that he and his sister had fallen in love, and simply wanted to have their relationship legalized.
"We just want to lead a normal life," he said. "People harass us all the time and call us the incest couple. They have no idea who we really are or how it all happened."
Stuebing's sister was not prosecuted by German authorities because she was considered "only partially liable for her actions," Thursday's court ruling said.
The sister "suffered from a personality disorder and was considerably dependent on him," the court said.
An appeal can be lodged against the court's judgment, which is not final, within the next three months.
