The court compared the ban on its decision to "a sign reading 'Whites Only' on the hiring-office door."
Since 1995, same-sex couples had been barred from becoming licensed foster-care providers in Nebraska.
"This is a victory for children and LGBT Nebraskans. There are tens of thousands of LGBT people who call the Cornhusker State home and thousands of Nebraska children in need of a foster care placement," said ACLU of Nebraska Executive Director Danielle Conrad in a statement.
The Nebraska rule comes as lawmakers began discussions on a bill that could ban workplace discrimination based on an employee's gender identity or sexual orientation.
The ruling stems from a lawsuit filed in 2013 by three same-sex couples, the ACLU of Nebraska, the ACLU LGBT and HIV Project, and the law firm of Sullivan & Cromwell LLP.
The couples had intentions of serving as foster parents but were turned down by state employees.
One couple claimed the staff of the state's Department of Health and Human Services discouraged them when they asked for information. Another couple said they were told same-sex couples could not be licensed even after they've gone through training and background checks.
State employees were citing a 1995 administrative memo written by the then-director of the department.
"It is my decision that effective immediately, it is the policy of the Department of Social Service that children will not be placed in the homes of persons who identify themselves as homosexuals. This policy also applies to the area of foster home licensure in that, effective immediately, no foster home license shall be issued to persons who identify themselves as homosexual," the memo reads, according to court documents.
The memo was removed from the agency's website during court procedures in 2015.
In 2015, a judge ordered the state agency to license gay and lesbians as foster parents but the state appealed the decision. State officials said in court they intended to place children in the most "family-like setting," the ruling states.
Similar to the Nebraska Supreme Court ruling, other coyrts across the nation have changed long-time policies and granted same-sex couples parenting rights in recent years.
Last year, a federal judge struck down a ban on adoptions by same-sex couples in Mississippi
. A few weeks before, the Supreme Court summarily reversed an Alabama Supreme Court decision
that had refused to recognize a same- sex parent adoption from another state.