The US federal judge overseeing the trial of the multi-millionaire dismissed on Friday the most serious charge of securities fraud, which carried a maximum 10-year prison term.
The decision was a major victory for Stewart, although she still faces charges of conspiracy, obstruction of justice and making false statements to federal investigators.
Explaining her decision, Judge Miriam Cedarbaum said the evidence provided to substantiate the securities fraud charge was "simply too weak" to prove criminal intent.
The ruling came as the defence and prosecution teams were due to begin their closing summations in the trial, which is expected to go to the jury some time next week.
Stewart is accused of ordering her broker to sell her stock holdings in biotech firm ImClone after she received an improper tip that federal regulators would not approve ImClone's anti-cancer drug, Erbitux.
The securities fraud charge was always considered the weakest part of the prosecution's case.
It was based on the argument that Stewart's statements of innocence over the ImClone selloff were an attempt to mislead investors and halt the downward spiral in the share price of her own company, Martha Stewart Living Omnimedia.