Brad Cabana, a Newfoundland man who is representing himself, had asked provincial Supreme Court Judge Gillian Butler to step aside because of personal, professional and political ties.
Cabana raised concerns that Butler is married to a senior partner with a St. John's law firm that is representing former premier Danny Williams. Cabana is embroiled in a defamation lawsuit and countersuit with Williams.
But Butler said Cabana failed to establish that informed and reasonable people would conclude that she is biased and should step aside.
"I believe that withdrawing would represent an unnecessary recusal and one that could tend to bring the administration of justice into disrepute," Butler said in her decision released Wednesday.
"I remain disinterested in the outcome of this matter and open to persuasion by the evidence and submissions of all parties."
Butler said Cabana's challenge should proceed, though dates have not been set.
Cabana, a political blogger and small businessman who is representing himself, said Wednesday he's reviewing the judge's ruling before deciding whether to appeal it.
He is trying to stop the $7.7-billion hydro development in Labrador, alleging various constitutional violations that he says could spell disaster for the province if the project is successfully challenged once it's built.
He says the province unjustly denied voters a chance to weigh in on the project in a referendum, but both the government and Nalcor Energy, Newfoundland and Labrador's Crown energy company, say his claim is without merit.
Muskrat Falls is expected to begin generating power by 2017.