An official in the prosecution office was quoted as saying the agent, Muhammad Ridha Aghdam Ahmadi, had been cleared due to "lack of proof" and the judiciary has moved to close the case.
IRNA said in the absence of a guilty verdict, the Iranian government had been ordered to pay "blood money" to Kazemi's family and appeared to signal the courts would not be pursuing the case any further, a decision likely to worsen already strained relations with Canada.
"If killer or killers could not be found, the diya (blood money) will be paid by the treasury," which amounts to 80 million riyals, approximately $9200, said the official.
Kazemi's family, who believe the investigation had focused on the wrong suspect, can appeal against the verdict, although it is not clear if that would result in another investigation to find the killer.
Kazemi, a 54-year-old freelance photographer with dual nationality, died in July 2003 from a brain haemorrhage, the result of a blow to her skull inflicted while she was in custody.
She had been arrested for taking photos outside Tehran's Evin prison, at the time packed with protesters who took part in last summer's wave of anti-regime demonstrations.
During his trial, the 42-year-old intelligence agent claimed he was a scapegoat and a victim of Iran's complex internal rivalries. During two days of hearings last week, the judiciary was accused of covering up for one of its own officials.
The judiciary initially claimed Kazemi died of a stroke, but a presidential inquiry led to a government report revealing she had been struck by a blunt object while being interrogated.
"If killer or killers could not be found, the diya (blood money) will be paid by the treasury"
Between her arrest and her admission to hospital she spent several days being shuttled between the custody of judicial prosecutors, the police and the intelligence ministry.
A team of lawyers led by Nobel Peace prize winner Shirin Ebadi, who were representing the Kazemi family, alleged in court the real killer could have been Muhammad Bakhshi, a senior justice official working in Evin prison.
The intelligence ministry is seen as being closer to President Muhammad Khatami's government after it underwent a major shake-up in 2000.
And in a controversial move, on the second day of hearing last week, the judiciary barred foreign diplomats, including Canada's ambassador to Tehran Philip MacKinnon, and foreign reporters from observing the trial. In response, Canada recalled its ambassador.
He had already been called home over the affair last year after Kazemi's body was buried at her birthplace in the south of Iran in a ceremony her mother claimed had been organised under duress.
Iran does not recognise dual nationality and said Canada had no business observing the trial since Kazemi's case was a "domestic affair".
Ebadi, a human rights lawyer, warned after the trial that if justice was not served in Iran she could take the case to an international tribunal.