Abdul Ameer Younis Hussein. a CBS cameraman, was filming the aftermath of a car bomb in the northern city of Mosul when he was arrested.A three-judge panel in Baghdad ruled that there was insufficient evidence against the 25-year-old.
However, Hussein was sent back to Abu Ghraib prison on Wednesday to await final US military approval for his release.
"I am so happy," said Hussein's brother, Mohammed Younis Hussein, who travelled from Mosul for the trial.
"I have cried a lot these months, but now I feel I can rest. It's incredible."
The defendant, who wore a yellow jumpsuit, was not permitted to speak to reporters.
Between appearances on the witness stand, he had to kneel on the floor in the back of the courtroom, facing a wall.
Half a dozen US soldiers in full body armour stood nearby, guarding him and other Iraqi defendants, who also faced the wall.
Hussein had been charged with participating in insurgent activity under Section 194 of the Iraqi criminal code.
Scott Horton, one of his American lawyers, said the US military had claimed he had prior knowledge of the car bombing and celebrated with other Iraqis in the aftermath, chanting "God is Great".
But the prosecution agreed and said there was not enough evidence, and that they wanted to drop the case.
Hussein said he encountered American troops surrounding the area, and waited until they cleared to go in and film.
After getting some footage, he said he heard people start yelling there were snipers in the area, and he felt a shot.
"They shot me in the hip," he said of the American troops. "I tried to stand up, but I couldn't."
After five minutes, US troops arrived and took him to the hospital.
"All the time they were cursing me, and calling me a terrorist," he said.
"I kept saying, I'm not a terrorist, I'm a correspondent."