Katsav, 65, was sentenced to seven years in prison for two counts of rape and sexual harassment in December, last year. He has denied the charges, claiming he is a victim of a political witch hunt.
The decision announced gives the former president months of freedom.
The court was convened last week to hear the former President`s appeal, who claimed that the sexual relations with the complainant were consensual.
He was convicted in December of two counts of rape against the complainant, publicly identified as `A` from the Tourism Ministry, and was sentenced to seven years in prison.
He was supposed to begin his sentence on May 8, but was allowed to remain free, when the Supreme Court accepted his request to stay out of jail pending the outcome of his appeal.
In his ruling, Supreme Court Judge Yoram Danziger wrote that his chances for appeal warrant his remaining free until the appeal process is complete.
However, the judge stressed that his decision did not constitute judicial ruling in favour of either of the sides.
The prosecution said in its argument against the appeal that "refraining from putting Katsav in prison could eat away at the public`s belief in the court system," Katsav`s attorney Avigdor Feldman said at the start of the hearing that there was no concern that his client would evade justice if his prison term was delayed, and added that he did not pose a threat to society.
"It would be far better that this case, which went through so many and such extreme tribulations and with all of its uniqueness, be heard in this honourable court, with the appellant arriving as a free man and not brought from the prison to the Supreme Court in shackles," his lawyers said in a request to postpone his sentence.
The disgraced former Israeli leader was set to begin his sentence on May 8. He was also ordered to post a 100,000 Shekels personal bail guarantee. The appeal process is likely to take several months.
He served as the eighth President of Israel, a leading Likud member of the Israeli Knesset, and a Cabinet Minister in its government.