A Swedish high court ruled on Thursday that Lindh's killer, Mijailo Mijailovic, is mentally ill and needs treatment instead of jail.
The decision overturns a lower court's life sentence for murder.
The high court's verdict is a victory for Mijailovic's defence lawyer, who appealed against the lower court's ruling and got a new team of psychiatrists to examine his client's state of mind after initial mental checks found him sane enough to go to jail.
The second evaluation deemed Mijailovic mentally ill and recommended treatment at an institution instead of imprisonment.
The first examination served as a basis for the lower court's 23 March verdict in favour of the prosecutor.
Last week the high court heard both psychiatric teams during a three-day trial. Mijailovic, 25, declined to testify.
He has admitted to stabbing Lindh repeatedly with a knife in a downtown Stockholm department store in September but has denied intent to kill.
The brutal attack on Lindh, a 46-year-old mother of two widely tipped before her death as Sweden's next prime minister, evoked painful memories in Sweden of the 1986 assassination of Prime Minister Olof Palme. That crime remains unsolved.