In a decision seen by AFP, the French magistrates leading the investigation said the evidence against Hassan Diab, who was extradited from Canada in 2014, was "not convincing enough" and ordered his immediate release.
The October 3, 1980, bombing of a synagogue on Rue Copernic in Paris killed four people and injured about 40.
It was the first fatal attack against France's Jewish community since the Nazi occupation in World War II.
He was arrested at his home in an Ottawa suburb in November 2008 at the request of French authorities who alleged he was a member of the Popular Front for the Liberation of Palestine (PFLP).
Evidence against Diab presented by prosecutors included a sketch of the bomber which resembles Diab and the discovery of a passport in his name with entry and exit stamps from Spain, where the bomber is believed to have fled.
Diab has insisted that he was in Beirut at the time of the attack to take university exams, which witnesses have corroborated.
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