"The US charges are not applicable under Thai law," said the judge delivering the verdict.
"This is a political case. The Farc is fighting for a political cause and is not a criminal gang. Thailand does not recognise the Farc as a terrorist group."
The judge ordered that Bout be released within 72 hours.
Phillip J Crowley, an assistant secretary at the US state department, expressed dismay at the Thai court's ruling.
"Obviously we're disappointed with the court decision, and as to what steps Thailand takes at this point, it would be up to the Thai government," he said.
"I think there is a prospect for the Thai government to appeal this lower court verdict but what they decide to do will be governed by Thai law."
US prosecutors had wanted to try him on charges of trying to sell large quantities of high-tech weapons, including surface-to-air missiles to the FARC rebels.
A court in New York had indicted Bout in absentia on four terrorism-related charges and if found guilty he could have faced a maximum penalty of life in jail.
Prosecutors say Bout's long-running career in arms smuggling saw him supply weapons to conflicts in South America, the Middle East and Africa, including to former Liberian dictator Charles Taylor.
Bout however has repeatedly denied the charges, claiming he ran a legitimate air cargo business and was in Bangkok at the time of his arrest to discuss selling aircraft to Thai businessmen.