"The evidence is overwhelming that the government improperly manipulated the administration of criminal justice in order to secure a criminal indictment[s] against defendant," Cardone wrote in her 38-page ruling.
Posada, a 79-year-old former CIA operative and fierce opponent of Fidel Castro, Cuba's leader, was scheduled to stand trial next week in Texas on immigration fraud charges.
He was imprisoned in Venezuela but escaped and later became involved with CIA operations in Central America.
Posada has denied involvement in the bombing that killed 73 people.
He has also been accused of being involved in a series of bombings inside Cuba in 1997, and of plotting to assassinate Castro in 2000 when he was arrested with a large cache of explosives in Panama.
Arturo Hernandez, Posada's lawyer, said it was "a victory for all freedom-loving Cubans in the world and a validation of the American legal system".
Case lost in translation
Posada was caught in Miami and sent to El Paso to face immigration charges in March 2005.
Federal prosecutors have accused him of lying about how he entered the US and other details.
Posada was released on bond pending trial last month and returned to Miami to be with his family - a move condemned by Cuba.
Cardone said the interpretation of the interview "is so inaccurate as to render it unreliable as evidence of defendant's actual statement".
She said Posada was entitled to certain rights under the US constitution and the court would "not set aside such rights nor overlook government misconduct because defendant is a political hot potato".
"This court's concern is not politics; it is the preservation of criminal justice."