Judge Carlos Castro Martins reversed the order he had issued in September, which had barred any work on the Belo Monte dam that interfered with the natural flow of the Xingu river.
He said the company behind the project had subsequently shown its work would not harm local fishing.
The project has been heavily criticised by environmentalists.
Judge Martins had originally ruled in favour of a fisheries group which argued that the dam would affect local fish stocks and could harm indigenous families who make a living from fishing.
He had barred the Norte Energia company behind the project from all work which could interfere with the natural flow of the Xingu river, including building a port, using explosives, installing dikes and building canals.
Legal wrangling
Norte Energia appealed against the decision and Judge Martins ruled on Friday that construction work on the dam could go ahead as the company had shown that local fishing boats would not be blocked or hindered in their work.
"Since the course of the water won't be altered, and there won't be much variation in the speed of its flow, (the project) won't have a major influence on the habitat of ornamental fish species used for fishing," he said.
Judge Martins did, however, say that the wider environmental impact of the project "could only be felt and analysed once the work was completed, as the studies into its effects were only forecasts of what could happen".
He also said that any work would have to comply with the regulations laid down by Brazil's Indian Affairs Department (Funai) and the National Environment Agency, Ibama.
Norte Energia said the temporary halt on the building work had not affected the project, as it had not yet reached the stage where the company needed to do any of the specific type of work which had fallen under the ban.
If it goes ahead, the 11,000-megawatt dam will be the third biggest in the world - after the Three Gorges in China and Itaipu, which is jointly run by Brazil and Paraguay.
The government says it is crucial to meeting growing energy needs, but environmentalists and those fighting for indigenous rights have been vociferous in their opposition.
A judge in Brazil has revoked a decision which had halted work on the Belo Monte dam in the Amazon region.