Justices in a unanimous ruling ordered the case of Stacey Dean Rambold assigned to a new judge for re-sentencing.
The decision means Rambold must serve a minimum of two years in prison under state sentencing laws, Yellowstone County Attorney Scott Twito said.
The high court cited, in part, the inflammatory comments of the sentencing judge, District Judge G. Todd Baugh, who drew wide condemnation for suggesting that the victim shared some responsibility for her rape.
Baugh said during Rambold's sentencing in August that the teenager was "probably as much in control of the situation as the defendant." He later apologized.
Rambold was released after fulfilling the original sentence last fall and is expected to remain free pending his reappearance in state District Court.
The defendant was a 47-year-old business teacher at Billings Senior High School at the time of the 2007 rape. The victim, one of his students, killed herself while Rambold was awaiting trial.
Rambold's sentence had been appealed by the state Department of Justice.
Attorney General Tim Fox said the Supreme Court's decision had "rebuffed attempts to place blame on a child victim of this horrible crime."
Under state law, children younger than 16 cannot consent to sexual intercourse.
Rambold's attorneys insisted in court filings that the original sentence was appropriate, and cited a "lynch mob" mentality following a huge public outcry over the case.
Like Baugh, they suggested the girl bore some responsibility and referenced videotaped interviews with her before she committed suicide. Those interviews remain under seal by the court.
Rambold attorney Jay Lansing was traveling and not immediately available, his office said.
The family of victim Cherice Moralez issued a statement through attorney Shane Colton saying the court's decision had restored their faith in the judicial system. The statement urged the family's supporters to continue working together to keep children safe from sexual predators.
During last year's sentencing hearing, prosecutors sought a 20-year prison term for Rambold with 10 years suspended.
But Baugh followed Lansing's recommendations and handed down a sentence of 15 years with all but 31 days suspended and a one-day credit for time served. Rambold was required to register as a sex offender upon his release and to remain on probation through 2028.
After a public outcry, Baugh acknowledged the sentence violated state law and attempted retroactively to revise it but was blocked when the state filed its appeal.
The Supreme Court decision did not specify what sentence would be more appropriate. That means Rambold potentially could face even more time in prison.
County Attorney Twito said he would consult with attorneys in his office and the victim's family before deciding how much prison time prosecutors will seek.
The case will likely be assigned to a new judge sometime next week, Baugh said Wednesday. He said he was not surprised by the court's decision.
The judge sparked outrage when he commented that Moralez appeared "older than her chronological age."
Her 2010 suicide took away the prosecution's main witness and resulted in a deferred-prosecution agreement that required Rambold to attend a sex-offender treatment program.
When he was booted from that program - for not disclosing a sexual relationship with an adult woman and having an unauthorized visit with the children of his relatives - the prosecution on the rape charge was revived.
During August's sentencing, the judge appeared sympathetic to the defendant, fueling a barrage of complaints against him from advocacy groups and private citizens. It also led to a formal complaint against Baugh from the Montana Judicial Standards Commission that's now pending with the state Supreme Court.
Justices said they intend to deal with Baugh separately. But their sharp criticism of the judge's actions signals that some sort of punishment is likely.
"Judge Baugh's statements reflected an improper basis for his decision and cast serious doubt on the appearance of justice," Justice Michael Wheat wrote. "There is no basis in the law for the court's distinction between the victim's 'chronological age' and the court's perception of her maturity."
Baugh, 72, was first elected in 1984. He has said he deserves a public reprimand or censure for undermining the credibility of the judiciary and plans to retire when his six-year term expires at the end of the year.
He was unsure when the Supreme Court would act on the complaint against him.
"I expect at some point to appear before them, but don't know when," he said.
The leader of a women's group that filed one of the complaints against Baugh said Wednesday's high court decision gave advocates only part of what they want.
"The other part of the victory will be when something is done about Baugh," said Marian Bradley, president of the Montana chapter of the National Organization for Women.