A court on Tuesday dismissed sedition charges against Shaikh Khalid Azan whom police said made inflammatory statements shortly before a spate of bombings rattled the Indian Ocean tourist haven.
Director of Public Prosecutions Uthman Masud said his office could not press ahead with the charges due to lack of evidence against Shaikh Azan.
Azan, head of the Society for Islamic Awareness (UAMSHO) was charged with allegedly inciting Muslims against the Tanzanian government for "un-Islamic actions".
The statements were said to have been made before a series of petrol bomb attacks in March on the homes of political and religious leaders on the island.
A hand grenade was also thrown into a restaurant frequented by tourists.
Azan, who had denied the charges, said he was happy to be free. But he also criticised the government for its handling of the bombing investigation.
"This demonstrates how oppressive this government is," he said, adding ''it arrests people randomly and then fails to stick their charges".
More than 30 people have been arrested and charged in connection with the attacks but so far the government has obtained no convictions and the cases have made little progress.
"This demonstrates how oppressive this government is...it arrests people randomly and then fails to stick their charges".
Shaikh Khalid Azan
The government has also failed to release a promised report on the investigation.
Early on the attacks were blamed on both the UAMSHO and the Opposition Civic United Front (CUF).
Some CUF members have called for the island's union with Tanzania to be dissolved on the grounds that the island is marginalised politically and economically.
Observers fear that if President Benjamin Mkapa's government does not address demands by Zanzibaris for more say over how the islands are governed, elections next year could see a repeat of the civil unrest sparked by disputed elections in 2000.