The case, which cost Benzema a place in France's Euro 2016 squad on home soil, is now expected to go to trial next year.
"We are pretty astonished because the decision is to reject our requests for the investigation to be cancelled," said Serge Money, who represents another suspect in the case.
The Versailles appeal court also asked the investigating magistrate to consider charging former Liverpool and Marseille striker Djibril Cisse for his alleged involvement.
Investigators suspect 28-year-old Benzema of acting as an intermediary between the presumed blackmailers -- including one of his childhood friends -- and Lyon midfielder Valbuena.
Benzema and three of the other suspects asked for the case against them to be dropped.
They say police used "dishonest" methods by posing as a friend of Valbuena's in a telephone conversation with one of the accused.
The court rejected their arguments and ruled the police's methods were permissible.
Benzema's lawyer Sylvain Cormier said his client would fight on to clear his name.
"Karim Benzema is innocent, he did nothing wrong in this case. We are going to do everything we can to prove his innocence," he said.
The prosecution says Cisse helped to further the deception by informing Valbuena that "rumours" were circulating about the existence of the tape.
Cisse, 35, was arrested as part of the investigation in 2015 but was released without charge.
He said in a TV interview at the time that he had only been arrested "so the investigators could hear my side of the story. I never swindled anyone -- Mathieu is a friend".
Valbuena's lawyer said the player was "delighted" by Friday's decision.
"It will allow there to be a public debate (about the case), which is what he has always wanted," Paul-Albert Iweins said.
Benzema has been usurped as France's star striker by Atletico Madrid's Antoine Griezmann, but national coach Didier Deschamps says he has not ruled out a return to the international fold for the Real forward.