Officials said the Supreme Court acquitted three villagers and one policeman of all charges on Friday, mainly because of lack of evidence.
Nearly 3000 villagers stormed the government-run rehabilitation centre in Bandarawela, 200km east of the Sri Lankan capital Colombo in October 2000, angry because some children at the centre had taken a Sinhalese officer hostage.
The mob killed 28 of the children with stones, knives and swords. The massacre sparked ethnic riots in which two people died.
In July 2003, a lower court convicted the four accused of murder, attempted murder and unlawful assembly and sentenced them to death. They appealed the sentences.
Rebels of the Liberation Tigers of Tamil Eelam, who began fighting in 1983 to establish a Tamil homeland in the north and east, denied that the children were former rebel fighters.
However, several residents at the rehabilitation centre said they had either been forced to join or had joined the rebels voluntarily. Human rights groups have accused the rebels of recruiting fighters as young as 10.