The sentence was for charges of theft and fraud in connection with bank loans she obtained for her employees.
Judge Eberhardt Bertelsmann, of the Pretoria High Court, reduced the sentence handed down in April 2003 from five years to three years and six months, and then declared it suspended in full on Monday.
In handing down his ruling, the judge said that Madikizela-Mandela had had "a long and often difficult role in public life" and that "during her lifetime, she supported a greater cause than her own".
"The crimes were not committed for personal gain," he ruled.
Madikizela-Mandela, the former president of the African National Congress Women's League (ANCWL), was convicted on 43 charges of fraud and 25 of theft totalling R1m ($156,000).
The judge overturned the conviction for theft but upheld the one for fraud.
Outside the courtroom, Madikizela-Mandela sounded defiant and said her lawyers would appeal against the judges' decision to uphold the fraud charges.
"I am as fine as I have always been," she said.
Speaking of the fraud charges, she said: "I have given instructions to my lawyers to appeal the judgment, a judgment that is completely wrong."
Her lawyer had argued in court last month that Madikizela-Mandela was only trying to help her clients when she obtained fraudulent bank loans for them by creating fictitious ANCWL employees.
"The crimes were
not committed for personal gain"
Pretoria high court judge, SA
Known as the Mother of the Nation, Madikizela-Mandela was cheered by her supporters when the judge handed down the decision in the courtroom, with many singing and "toyi-toying", a warlike shuffle from the struggle era.
President Thabo Mbeki's governing African National Congress (ANC) said it respected the judge's ruling and underscored that she did not deserve to go to jail.
"Winnie is a tried and tested leader of the ANC who has gone through hard experiences and sacrifices in the process of the liberation struggle," the ANC said in a statement.
"Her experiences and leadership are valued by everyone across the racial spectrum in our country and throughout the world," it said.
Her co-accused, financial services broker Eddie Moolman, also had 25 theft charges against him quashed, but he still faces a jail sentence for fraud.
The judge reduced Moolman's conviction for fraud from five years to four.
Winnie Madikizela came into Mandela's life about six years before he was jailed for high treason by the apartheid government.
The couple married in June 1958 and had two daughters.
Soon after the wedding she was arrested for delivering a fiery speech, leading Mandela to remark, proudly and prophetically: "I think I married trouble."
Nelson Mandela divorced Winnie
shortly after his prison release
In the coming years, Madikizela-Mandela would be in and out of jail as the police hounded her in a bid to demoralise her.
In 1969, she was held in solitary confinement for 13 months on terrorism charges and again for six months in 1973, but when the 1976 student rioted in Soweto, Winnie was unbowed, urging crowds to "fight to the bitter end".
The police saw her as a mastermind of the uprising. She was locked up for five months, then banished to the desolate town of Brandfort for seven years.
In 1986, at a time when suspected traitors were being burned alive with a tyre around there bodies in the townships by what was known as "necklacing", Winnie declared that South Africans would be freed "with our matchboxes".
She surrounded herself with a band of thugs, christened the Mandela United Football Club, who murdered a young activist, Stompie Sepei.
Her bond with Mandela endured through letters and visits to prison and when he was released in 1990, Winnie was there holding his hand but the couple were later divorced.