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But there is no possibility of sharia courts sitting in the UK, Lord Phillips of Worth Matravers added.
Lord Phillips, the most senior judge in England and Wales, said there was no reason sharia law's principles could not be used in mediation.
The Archbishop of Canterbury prompted controversy when he said use of certain aspects of the law "seems unavoidable".
Sharia is a set of principles which govern the way many Muslims believe one should live one's life.
In a speech at the East London Muslim Centre in Whitechapel, Lord Phillips said that sharia suffered from "widespread misunderstanding".
Alternative resolution
Lord Phillips said: "There is no reason why sharia principles, or any other religious code, should not be the basis for mediation or other forms of alternative dispute resolution.
"It must be recognised, however, that any sanctions for a failure to comply with the agreed terms of mediation would be drawn from the laws of England and Wales."
But severe physical punishments such as flogging, stoning and the cutting off of hands would not be acceptable, he said.
He added: "There can be no question of such courts sitting in this country, or such sanctions being applied here.
"So far as the law is concerned, those who live in this country are governed by English and Welsh law and subject to the jurisdiction of the English and Welsh courts."
Williams 'misunderstood'
The Archbishop of Canterbury, Dr Rowan Williams, had been misunderstood when it was reported in February that he said British Muslims could be governed by sharia law, the judge said.
Dr Williams suggested that sharia could play a role in "aspects of marital law, the regulation of financial transactions and authorised structures of mediation and conflict resolution".
Lord Phillips said: "It was not very radical to advocate embracing sharia law in the context of family disputes, for example, and our system already goes a long way towards accommodating the archbishop's suggestion.
"It is possible in this country for those who are entering into a contractual agreement to agree that the agreement shall be governed by a law other than English law."
(BBC)
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