Israeli settler Yosef Haim Ben-David, 31, was found to have led the assault, but his lawyers had submitted last-minute documents saying he suffered from mental illness.
Tuesday's ruling clears the way for him to be sentenced, with his conviction having been put on hold while the court decided on his sanity plea.
"The court has found that at the time he committed the offence, the accused was not psychotic, fully understood the facts, was responsible for his actions, had no difficulty in understanding reality and had the capacity to prevent the crime," a statement from the justice ministry describing the ruling said.
In February, a court sentenced his two young Israeli accomplices to life and 21 years in prison for the killing, which was part of a spiral of violence in the runup to the 2014 Gaza war.
The two were minors at the time of the chilling attack in which they snatched Mohammed Abu Khdeir, 16, from an east Jerusalem street and then killed him.
His murder was seen as revenge for the killing of Israeli teenagers Naftali Frenkel, Gilad Shaer and Eyal Yifrach, who were abducted from a hitchhiking stop near the flashpoint West Bank city of Hebron.
Israeli authorities said the suspects had decided to kill an Arab and equipped themselves with cables, petrol and other materials before randomly choosing Abu Khdeir.
