The probe, to be conducted by the state's special investigation team, will have to report its findings to the court within three months.
A third former chief minister, SM Krishna - whose name also figured in the Lokayukta reports - will not be investigated for now.
"We had gone through the Lokayukta report and there is nothing, not even a whisper against Mr Krishna," the top court's bench comprising Justices PC Ghose and RF Nariman observed.
A social activist TJ Abraham had alleged the politicians had connived with bureaucrats to allow private businesses move into a huge tract of forest land in Ballari for iron ore mining. These relaxations were illegal and violated the rules, he had alleged.
"The Supreme Court specifically ordered that no other court shall interfere or pass any kind of order as far as this complaint is concerned," the activist told NDTV.
SM Krishna, who recently quit the Congress to join the BJP in Karnataka, had approached the Supreme Court in 2011 after the Karnataka police named him and 10 others, including the two former chief ministers. He was then Union Minister for External Affairs in the UPA government.
The Supreme Court had stayed the probe against Mr Krishna for de-reserving the forest blocks for mining when he was chief minister during 1999-2004. The soft-spoken Dharam Singh was appointed chief minister as the consensus candidate in April 2004 when Congress joined hands with the Janata Dal (Secular). But the government collapsed after HD Kumaraswamy of the JD (S) - son of former Prime Minister HD Deve Gowda - walked out of the coalition in 2006. Mr Kumaraswamy later became chief minister for a year with support from the BJP.
"I welcome the top court's directions to complete the probe into illegal mining report submitted by Lokayukta Justice N. Santhosh Hegde in a three months' time," Mr Kumaraswamy said, in a statement.