Maharashtra passed the law last year after the top court overturned an earlier ban by the state government.
The state government first banned dance bars in 2005, saying they "corrupted young people and were a front for crime and prostitution".
Bar owners and dancers had bitterly protested against the ban.
Before the ban, more than 100,000 women were employed in some 1,400 dance bars in the state.
The women would dance to Bollywood numbers and clients often threw money at them.
The case has been going on in the court for a long time.
* The 2005 ban was first overturned by the high court in Mumbai in April 2006, but soon after the ruling the state government appealed in the Supreme Court which ordered the bars to remain closed until it gave a final order.
* In July 2013, the Supreme Court said the bars could reapply for their licences and they could reopen.
* In June 2014, the Maharashtra government amended the law, which effectively banned the dance bars once again.
* On Thursday, the Supreme Court judges stayed the 2014 law saying that it wasn't very different from the law passed in 2005 which they had already declared unconstitutional.
The court ruled that dance bars could now reopen, but said that licensing authorities had the power to regulate "indecent" dance performances.
The judges said they would hold a final hearing in the case on 5 November.
India's Supreme Court has stayed a law banning dance bars in the western state of Maharashtra and its capital Mumbai, allowing them to reopen.