"On the basis of the foregoing, the appeals chamber ... reverses his conviction for complicity in genocide," said Fausto Pocar, the presiding appeal judge.
Pocar ruled that it was impossible to show "beyond a reasonable doubt that without knowledge of the mass killings, Mr Blagojevic's awareness of other facts ... shows that he had knowledge of the principal perpetrators' genocidal intent".
The appeal judges upheld Blagojevic's other convictions for aiding and abetting murder, persecutions on political and racial grounds and inhumane acts.
They also upheld convictions on Dragan Jokic, a major in the Bosnian Serb army's Zvornik brigade, for murder, extermination and persecution on racial grounds.
Jokic's nine-year sentence was unchanged.
The massacre at Srebrenica was the largest atrocity committed on European soil since the end of World War II.
Under Blagojevic's command, troops separated men and women in the eastern Bosnian enclave before loading them on to buses.
The Muslim men spent the night in the town of Bratunac before being transported to execution sites.
Jokic organised machinery and troops to dig mass graves for some of those killed at Srebrenica.
The alleged leaders of the massacre, Radovan Karadzic, the Bosnian Serb leader, and General Ratko Mladic, his military chief, are still at large.
Since its creation in 1993, the court has handed down only one definitive conviction for aiding and abetting genocide.
It sentenced General Radislav Krstic, who led the troops that took over Srebrenica, to 35 years in prison in April 2004.