Lawyers also defending ban on full-face veils at European court
The Paris court's decision was announced at the same time as French lawyers defended the country's ban on full-face veils in public before the European Court of Human Rights in Strasbourg.
The two cases have divided French public opinion for years, with the bans enjoying wide support in public opinion but being denounced by many Muslims as discriminatory.
France has both the largest Muslim minority in Europe, estimated at five million, and some of the continent's most restrictive laws about expressions of faith in public.
"Today a republican institution has reaffirmed the strength of the principle of secularism," Richard Malka, the lawyer for the Baby Loup daycare centre, said following the decision.
The Collective against Islamophobia in France (CCIF), a Muslim rights group, denounced the ruling as "a veritable judicial scandal" that meant "nobody is protected against being judged by one's religious, ethnic or social origin."
President Francois Hollande initially supported calls to extend the public sector ban on headscarves to some private businesses because of the Baby Loup controversy but backed off when legal advisers warned this could be discriminatory.
First European court case
The privately run Baby Loup fired Fatima Afif in 2008 after she began wearing a headscarf to work despite an internal dress code banning religious wear in the crèche, which took care of infants of 55 different nationalities.
A labour relations tribunal upheld her dismissal but France's highest appeals court disagreed, saying the crèche was not a public service bound by the official secularism policy.
This led to the calls to extend that policy to some private projects, especially those dealing with small children who, according to proponents of a tighter law, could be influenced by a caretaker clearly displaying her religious affiliation.
In the eastern city of Strasbourg, France defended its ban on full-face veils in public as a democratic law backed by "a strong conviction among the French public."
"Wearing the full veil not only makes it difficult to identify a person, it makes her indistinguishable from other full veil wearers and effectively erases the woman who wears it," said French government lawyer Edwige Belliard.
Citizens were free to wear other clothes or symbols in public that indicated their religious beliefs, she added.
Ramby de Mello, a British lawyer representing the unnamed French Muslim who challenged the full veil ban, said the law violated his client's religious, free speech and privacy rights and made her feel "like a prisoner in her own country."
The veil was "as much part of her identity as our DNA is of ours," he argued. A ruling is not expected for several months.
This was the first time the Strasbourg court has considered the legality of the full-face veil in public. Belgium and the Swiss canton of Ticino have also banned it and politicians in Italy and the Netherlands have proposed a similar law there.
