A group of residents of the island in the Aegean Sea filed a lawsuit against the Homosexual and Lesbian Community of Greece (OLKE) in April, urging it to cease to use the word 'Lesbian,' claiming it damaged the islanders' identity.
The court said in its ruling that the term was not a symbol of a person's status or personality and therefore could be freely used by gay groups in the country and abroad.
The ruling can be appealed at a higher court.
OLKE had accused the plaintiffs of homophobia, but refused to make a counterclaim.
The island of Lesbos, also referred to as Mytilene, is a popular tourist destination for gay women. The island was home to the 7th century Greek poet Sappho, who expressed passion for women in her poems.