The State Council challenged the legitimacy of the island deal, which was announced in April during a visit to Egypt by Saudi King Salman and which prompted a public outcry and demonstrations against President Abdel Fattah al-Sisi.
A judge told AFP that the decision "cancels the signing" of the accord, which demarcated Egypt's maritime border with Saudi Arabia to put two islands in the Straits of Tiran under Riyadh's control.
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Saudi Arabia is one of Sisi's main regional backers, and the kingdom has provided Egypt with billions of dollars worth of aid and investment since the former army chief took power.
Cairo says the islands had always belonged to Saudi Arabia and that Egypt had merely administered them while on lease since the 1950s.
Critics accuse Sisi of "selling" the islands in return for Saudi investments.