The public prosecutor had called for the suave potential candidate in next year's presidential election and bitter Sarkozy rival to be given a 15-month suspended sentence in the so-called Clearstream scandal.
"I want to salute the independence of our judiciary which has held out against political pressure," Villepin said after the verdicts were read out in a clear attack on what he claims was a politically motivated case.
"I'd like to believe that this decision will help to make our old country less vulnerable to rumour and slander," he said, recalling that the Clearstream scandal erupted just ahead of the 2007 presidential election.
"How I would like this to be a lesson for the 2012 presidential election," he said.
Villepin and his former mentor, ex-president Jacques Chirac, were accused over the weekend of having received $20 million dollars from African leaders, including to finance elections.
They have denied the allegations, which are being investigated.
Villepin has suggested those revelations were also aimed at his potential bid for the presidency, in which he could split the vote on the right and derail Sarkozy's chances of getting through to the second round.
The Clearstream case centred on a fake list of names that falsely implicated Sarkozy in kickbacks on arms deals with Taiwan, with Sarkzoy accusing Villepin of causing his name to be on the list.
The trial focussed on a web of murky claims and counter-claims about who in European defence company EADS, owner of Airbus, was responsible for the fake list, and whether Villepin could have prevented it.
Villepin, a diplomat best remembered for leading the charge against the Iraq war at the United Nations in 2003, was cleared of all charges in a first trial that ended last year.
Public prosecutors appealed but Sarkozy did not take part in the appeal.
Two co-accused -- former deputy boss of aerospace giant EADS Jean-Louis Gergorin and former EADS employee and mathematician Imad Lahoud -- were jailed for six and 18 months respectively and fined €40,000.
Prosecutor Jean-Louis Perol had accused Villepin of being guilty of "complicity by abstention" for failing to stop the false claims.
The case dating back to 2004 centres on a list -- later proved to be false -- of account holders at the Clearstream bank in Luxembourg who had allegedly received kickbacks from the sale of French frigates to Taiwan.
One name on the list was that of Sarkozy, then finance and interior minister under Chirac.
Sarkozy served alongside Villepin under Chirac, but the pair fell out over who should succeed him.