The bank had filed a motion to have a suit for fraud over the sale of questionable mortgage securities that dealt buyers $11.2 billion in losses in the housing crisis dismissed.
But Justice Marcy Friedman of New York's Supreme Court authorized the state's attorney general to pursue the suit in a decision Wednesday.
Freidman denied the bank's claim that a three-year statute of limitations had been exceeded, insisting that the state had six years to file against Credit Suisse.
New York Attorney General Eric Schneiderman sued Credit Suisse in November 2012, stating that the Swiss bank deceived investors over the quality of residential mortgage-backed securities (RMBS) that it sold in 2006 and 2007.
The suit said that the bank knew that the RMBS it was selling as quality investments were full of high-risk, subprime home loans that the bank's own traders branded "garbage."
The decision opens the way for a settlement between state authorities and the bank or proceedings that could result in heavy fines of up to several billion dollars.
In 2013, US bank JPMorgan agreed to pay $13 billion to federal and state agencies for losses related to falsely marketed mortgage-backed securities, bringing an end to proceedings initiated by Schneiderman and others.
Citigroup and Bank of America paid $7 billion and nearly $17 billion respectively this year to settle claims over risky mortgage securities.