Robert Menard, the far-right mayor of Beziers, had refused to bow to demands from regional authorities to banish a nativity scene from the town hall.
On Friday, he won the backing of a court in regional capital Montpellier which said there was no reason to remove it in the absence of a threat to public order.
But the "nativity wars" continue to rage elsewhere in France.
The authorities in Vendee, traditional heartland of French Catholicism, are appealing a recent court ruling that ordered the removal of nativity scenes in the western town.
And another court is set to pass judgement on a nativity scene in the courtyard of the town hall in Melun near Paris.
A group called the Federation of Free Thinkers has been fighting since 2005 to stop the mayor allowing the scene to be installed at Christmas time.
"We tell him every year that there is a little Jesus in this creche and that there are not only Christians in Melun," said president of the federation Laurent Tribouillard.
"He's a mayor. He more than anyone should respect the laws of the Republic."
A 1905 law firmly separates church and state in France, preventing any religious symbols from being displayed in public offices.
The Melun town hall argues the nativity scene is a tradition and not a religious symbol.
But the magistrate's office charged with looking into the case has argued otherwise.
"It clearly amounts, from our point of view, to a religious symbol. Indeed, the symbolism is underlined by the fact that one of the Three Kings is carrying a cross," it said in a statement.
The Melun court, which generally follows the findings of the magistrate, is due to give its judgement on Monday.