Connelly was jailed in 2009 over the death of her 17-month-old son, Peter, who suffered more than 50 injuries, including fractured ribs and a broken back.
The case sparked outrage as Baby P received 60 visits from social workers, police and health professionals over eight months.
Justice Secretary Dominic Raab had asked the Parole Board to reconsider their decision to release Connelly.
Responding to the ruling, he said her actions were “pure evil” and the choice made by the board demonstrates why it “needs a fundamental overhaul – including a ministerial check for the most serious offenders”.
The decision means the 40-year-old could be freed from prison within weeks.
However, she will be subject to restrictions on her movements, activities, who she contacts and 20 extra licence conditions.
These include living at a specified address, wearing an electronic tag, following a curfew and having to disclose her relationships.
She has also been told she cannot go to certain places to “avoid contact with victims and to protect children”.
Connelly was released on licence in 2013 but was recalled to prison just two years later for breaching her parole conditions.
In the past seven years, she has been refused parole three times.
Her boyfriend, Steven Barker, and his brother, Jason Owen, were also imprisoned after being convicted in relation to Peter’s death.
In March, the Parole Board, which is independent of the government, decided Connelly was fit for release, despite three bids for her to remain behind bars.
The board heard how she is now considered to be at “low risk of committing a further offence” and that probation officers and prison officials support the plan.
On Thursday, a spokesperson said that, following the appeal made by Mr Raab, a judge has ruled the original decision to release Connelly “was not irrational” and had been upheld.
The justice secretary’s request was made under the so-called reconsideration mechanism, which allows him, or the prisoner, to challenge the board’s decision within 21 days if they believe it to be “procedurally unfair” or “irrational”.