The high court said there was no constitutional requirement for him to write formally to parliament, informing them he is on “medical vacation”.
This would automatically lead to his deputy becoming acting president.
President Yar’Adua has been away for two months, raising fears of a power vacuum and calls for him to step down.
“The failure to transmit a written declaration to the national assembly before proceeding on vacation is not unconstitutional,” said federal high court judge Dan Abutu, dismissing the case brought by the Nigerian Bar Association (NBA).
The judge also said that Vice-President Goodluck Jonathan could continue to act on the president’s behalf, without needing to be formally appointed as interim leader – upholding a similar ruling in a previous case.
Nigeria’s Justice Minister Michael Aondoakaa said the question of whether Mr Yar’Adua should hand over power was now “settled”.
But the BBC’s Ahmed Idris in the capital, Abuja, says there is a general feeling among Nigerians that the constitution needs a thorough, and immediate, review to avoid similar problems in the future.
On Wednesday, the Senate passed a resolution calling on the president to provide a formal letter informing parliament of his absence.
At the same, the cabinet issued a statement that President Yar’Adua was “not incapable” of running the country.
This followed a previous court ruling giving ministers two weeks to make such a declaration.
The president flew to Saudi Arabia in late November for medical treatment and has not been seen in public since.
In his only broadcast interview since he left the country, he told the BBC’s Hausa Service on 12 January that he would return to resume his duties as soon as his doctors would allow.
As well as the flurry of court cases brought by his opponents, crowds of demonstrators have sporadically taken to the streets in Abuja and Lagos demanding power be handed to Vice-President Jonathan.
Correspondents say it is unlikely Wednesday’s ruling will do much to stop the intensifying pressure for something to be done about the perceived power vacuum.
The most recent move has come from powerful quarters: A group known as the Eminent Elders, including three former heads of state – civilian and military – asked Mr Yar’Adua to send a letter allowing Mr Jonathan to formally become acting president.
The group said Mr Yar’Adu’s absence was causing concern not only to Nigerians but to anyone doing business with the country.
On Thursday, the United States and European Union expressed their concern about the political crisis for the first time.
In an open letter, they said they welcomed constitutional efforts to “resolve the question of governing authority in the president’s prolonged absence”.
Correspondents say one reason for Mr Yar’Adua’s reluctance to allow Mr Jonathan to act on his behalf is the ruling People’s Democratic Party’s tradition of alternating power between north and south.
Mr Yar’Adua is a northerner, while the vice-president is from the south. So if Mr Jonathan took over, that would shorten the north’s stay in power.
The president is suffering from an inflammation of the lining around the heart and has long suffered from kidney problems.