The US District Court Judge in Michigan on Thursday acquitted the men, after the US Justice Department admitted that prosecutors "committed a pattern of mistakes and oversights" that hindered the men from reviewing evidence against them.
"The prosecution’s understandable sense of mission and its zeal to obtain a conviction overcame not only its professional judgment, but its broader obligations to the justice system and the rule of law," Judge Gerald Rosen of the US District Court for the Eastern District of Michigan said in his ruling.
Prosecutors had accused four original defendants of belonging to a "sleeper operation combat cell" conspiring to launch attacks in the United States, Jordan and Turkey.
The alleged ringleader, Abd al-Illah al-Mardoudi and Karim Koubriti were convicted in June 2003 on charges of conspiracy to provide material support for terrorism and document fraud.
A third, Ahmad Hannan, also a Moroccan, was convicted of document fraud. The fourth defendant was acquitted.
They were caught in a roundup of hundreds of Arab immigrants following the September 11 attacks on New York and Washington.
Although it dismissed the terror-related charges, the US court ordered a new trial for the lesser document fraud convictions of the three men.
US Attorney-General John Ashcroft last year had heralded the convictions of the three men as a clear message that the United States would work diligently to disrupt and dismantle terrorist 'sleeper cells' at home and abroad.