A photo of a man with bloody hands screaming with joy in a Palestinian police station after the two soldiers were beaten to death became an iconic image from the second Palestinian intifada, or uprising.
Hatem Maari, a Palestinian arrested shortly after the incident and sentenced to life imprisonment in 2004 for his role in the lynching, had sought a new trial.
The military court granted his request following "new elements that make it difficult to prove his effective participation in the killing of one of the soldiers," the army said in a statement.
He was still found guilty of aggression against a soldier and not preventing an offence and sentenced to 11 and a half years in prison, the army said.
With time already served he was immediately released.
In October 2000, the two Israeli reservists drove into Ramallah in the occupied West Bank by mistake and were taken to a police station for their own safety.
Images filmed by an Italian television channel showed the crowd storming the police station where they were detained.
Later, the crowd was seen striking one of the soldiers who had apparently been beaten to death.
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