Tarek el-Zomor, 45, should have been released in October 2003 after serving 22 years for his part in plotting Sadat's killing during a military parade in Cairo, the court said in a verdict issued on Tuesday.
But the next step is now in the hands of the Interior Ministry, which must either release him or appeal the court's ruling. The ministry last year rejected a similar order by the court to free el-Zomor.
El-Zomor was sentenced to 20 years in prison along with his cousin Leiutenant Colonel Abboud el-Zomor, 57, the maximum term under Egyptian law.
Sadat murder conspiracy
The Interior Ministry has the discretion to hold a prisoner for up to five years or more on security grounds.
Tuesday's ruling did not include the elder el-Zomor.
The two cousins were arrested in October 1981 and convicted in 1984 of plotting Sadat's assassination and belonging to the outlawed Islamic Jihad group, but did not actually shoot the president themselves.
Those who did were captured and executed.
Islamic Jihad, the principal group behind the assassination were opposed to Sadat's 1979 Camp David peace deal with Israel.
In the late 1990s, Islamic Jihad is beleieved to have merged with the al-Qaida group, which is blamed for the September 11 attacks on the United States.
However, in the past few years, many of its jailed leaders have since renounced violence.