The Supreme Court ordered the Gujarat government to take up the issue of a retrial, through state prosecutors. In a rare move, it also ordered the new trial be moved from Gujarat to neighbouring Maharashtra state.
"This judgement is a victory for justice, secularism and the Indian constitution," said Mihir Desai, a lawyer for survivor and chief witness Zahira Shaikh, 20.
The Best Bakery case, named after the shop where the killings happened, has come to symbolise the lack of major progress in bringing to account those responsible for the riots.
The riots broke out after 59 Hindu pilgrims were burned to death in an attack on a train.
Officials say 1000 people were killed in the riots, India's worst religious violence in a decade, but human rights groups say at least 2000, most of them Muslims, were killed.
Shaikh had appealed to the Supreme Court for a retrial outside Gujarat after saying she had been intimidated into changing her testimony in the original case.
"This is a historic judgement. Retrials are very rare in India. And it's even rarer for a trial to be transferred on the basis of a statement by one witness," another of her lawyers, Aparna Bhat, said.
"This judgement is a victory for justice, secularism and the Indian constitution"
Twenty Hindus and a Muslim were charged with murder after a mob of about 100 people attacked the bakery, owned and run by Shaikh's family, on 1 March 2002, and killed 12 people inside, including three Hindus.
But a Gujarat state court acquitted them in July last year because of a lack of evidence.
Shaikh said later she had been repeatedly threatened that if she spoke the truth in court, she and her family would be killed.
"We had locked ourselves on the terrace. The crowd had swords, sticks, petrol cans. My sister, uncle and three of his children who were downstairs were all burned alive," she told reporters after the acquittal.
Gujarat is ruled by the Bharatiya Janata Party, which also leads the ruling national coalition. In the wake of the riots, the state government faced criticism that it did nothing to stop the violence for the first few days and survivors accused the state police of working with the rampaging mobs.