Domina said the ruling means that the governor's office has no role to play in the pipeline, and decisions within the state must be made by the Public Service Commission. The commission was created in 1890s to prevent governors from granting political favors to railroad executives who wanted to expand through private property.
The decision on a federal permit still rests with President Barack Obama.
Pipeline opponents called Wednesday's ruling a victory for landowners.
"TransCanada learned a hard lesson today: Never underestimate the power of family farmers and ranchers protecting their land and water," said Jane Kleeb, executive director of the anti-pipeline group Bold Nebraska.
Jason MacDonald, a spokesman for Canadian Prime Minister Stephen Harper, said it would be difficult to comment on the ruling because the Canadian government doesn't yet have the details. MacDonald said the pipeline will create thousands of jobs and noted the U.S. State Department has concluded it is a project that is in the interest of both countries.
U.S. State Department spokesman Douglas Frantz said officials were aware of the Nebraska ruling but would not comment because the case was ongoing.
Daniel J. Weiss, senior fellow and director of climate strategy with left-leaning think tank Center for American Progress, said Obama and Secretary of State John Kerry will probably wait until Nebraska has legally approved the pipeline route before making any decision on whether to approve the permit.
"This court decision provides more uncertainty for pipeline proponents, and more time to organize for pipeline opponents," Weiss said.
U.S. Rep. Lee Terry of Nebraska, a Republican supporter of the pipeline, said he was confident the ruling would be overturned. Terry also said the ruling shouldn't stop Obama from approving a federal permit.
"This is a terrible decision and if upheld lead to increased dependence on foreign sources of oil, continued unemployment and lost economic impact for thousands of Nebraskans and our communities," he said.
Randy Thompson, a Nebraska rancher and a leading plaintiff in the lawsuit, praised the ruling. Thompson became involved in the dispute after he was notified that the original Keystone XL route would have crossed his parents' 400-acre farm in Merrick County. He said he doesn't think TransCanada should be able to use the course to force landowners to sign pipeline contracts through eminent domain.
"They came out here like a bunch of bullies and tried to force it down our throats," Thompson said. "They told us there was nothing we could do to stop it."
Associated Press writer Josh Funk in Omaha, Neb., Rob Gillies in Toronto and Matthew Daly in Washington contributed to this report.