But seven other top Hindu nationalist leaders, including the Human Resources Minister Murli Manohar Joshi, have been charged with inciting the mob that pulled down the 16th century mosque in the northern Indian town of Ayodhya.
"Advani is discharged," special court judge V.K.Singh ruled.
The charges brought against Advani by federal police included spreading communal frenzy, rioting and unlawful assembly.
The judge gave no reason for discharging Advani, but court officials hinted the charges were dropped since they were based only on suspicion.
Soon after the court ruling, Joshi offered to resign to Prime Minister Atal Behari Vajpayee, who is on an overseas tour untill 27 September.
But insiders in the ruling Bharatiya Janata Party said the resignation offer was likely to be rejected.
The court ruling is a major reprieve for Advani, who is also the country's home minister.
Advani had led a drive in the 1980s to build a temple on the site.
His campaign culminated in 1992 when thousands of Hindu fanatics stormed the mosque and razed it to the ground.
Hindus say the mosque was built after demolishing a temple and want it rebuilt. They also claim the site to be holy by virtue of being the birthplace of Hindu deity Ram.
But Muslims, who make 12% of India's population, want the mosque rebuilt.