Judge Andreas Vosskuhle at the Federal Constitutional Court in Karlsruhe said the right to a self-determined death included "the freedom to take one's life and seek help doing so".
The court also surprised observers by explicitly stating that the right to assisted suicide services should not be limited to the seriously or incurably ill.
The freedom to choose one's death "is guaranteed in all stages of a person's existence", the verdict read.
Passed by lawmakers in 2015, the existing law, known as Paragraph 217, was mainly aimed at barring associations dedicated to helping patients wanting to die. It also meant medical personnel faced prosecution for prescribing life-terminating drugs.
The legal uncertainty worsened when a lower court ruled in 2017 that officials could not refuse lethal medication in extreme cases, creating confusion among doctors.
Wednesday's verdict was closely watched in a fast-ageing country where Catholic and Protestant Churches still exert strong influence, but polls show growing public support for physician-assisted suicide.
It is also a sensitive subject in Germany as the Nazis used what they euphemistically called "euthanasia" to exterminate around 200,000 disabled people.
At the heart of the debate was the plaintiffs' argument that Germany's constitution guarantees personal freedom and dignity, which they said includes the right to choose when and how to die. The court agreed with their reasoning and found the restrictions imposed by Paragraph 217 made it "impossible" for people to receive help from third party professionals in Germany. Under Paragraph 217, professionals falling foul of the law risked a fine or up to three years in prison.
This left German patients turning to family members or loved ones for help, some getting life-terminating medicine from abroad.
Judge Vosskuhle said those who wanted to offer suicide assistance must be legally allowed to, without however being forced to do so.
The court stressed however that legislators still had "a broad spectrum" of options to regulate assisted suicide, for instance through mandatory waiting periods or consumer protection standards for assisted suicide associations. The German government said it would study the court's verdict "very closely" before deciding the next course of action.
Church representatives reacted with dismay to the annulment of Paragraph 217.
In a joint statement, the German Bishops' Conference and the Evangelical Church of Germany said they feared elderly or sick people would feel "internal or external pressure" to make use of assisted suicide services.