U.S. District Judge Susan Bolton also blocked parts of the bill that required immigrants to carry their papers at all times and made it illegal for undocumented workers to solicit employment in public places.
"Requiring Arizona law enforcement officials and agencies to determine the immigration status of every person who is arrested burdens lawfully-present aliens because their liberty will be restricted while their status is checked," Bolton ruled.
"There is a substantial likelihood that officers will wrongfully arrest legal resident aliens under the new [law]," wrote Bolton.
"Today, it's a historical win for our community, but it's just the beginning of the work that we need to do," said Jeff Zetino, Promise Arizona.
Those who support the law say an exodus of undocumented workers will open up low-paying jobs and save tax payers' money on schools and social services. Those who oppose it say it's unconstitutional.
Several protests have taken place across the country since Arizona Gov. Jan Brewer signed the bill in April.
"I think that it's important to remind everybody that today they absolutely -- the federal government got relief from the courts to not do their job," Brewer said Thursday.
Arizona Attorney General Terry Goddard objected to the content and the intent of the new immigration law.
"I think that's a big relief for many people, but for Arizona, it's an opportunity to step back from the controversy and to focus on how do we fix the immigration system that's been broken, how do we protect ourselves from border crime," said Goddard.
Maricopa County Sheriff Joe Arpaio supported the new law.
"Any police officer that arrests anyone on a criminal violation -- all that cop has to do is book them into our jail, and we are going to determine if they are here illegally. That's anybody," said Arpaio.
"I think Senate Bill 1070 is in support of federal law and it's a mistake for a judge to declare it unconstitutional," said Arizona Dept. of Education Superintendent Tom Horne.
"It is a racist bill," said Phoenix resident Manny Martinez. "And when I saw that, it brought sadness to me. Now it brings great joy."
In an exclusive Eyewitness News poll, viewers were asked, "Do you agree or disagree with Arizona's new immigration law?" Of the responses, 51 percent said they agree, 40 percent said they disagree and 8 percent said they are undecided.
The Associated Press contributed to this story.