The decision saves the Democrat party, led by Prime Minister Abhisit Vejjajiva, from dissolution but is likely to anger opponents of the government who believe Thai politics is subject to legal double standards.
"The filing by the Electoral Commission is unconstitutional because the process was not done properly," said judge Udomsak Nitimontree, reading out the ruling at the court in Bangkok.
He said the six judges voted to drop the case four to two, after the closing remarks were made on Monday morning in the trial, which centred on charges of misuse of a 29-million-baht (960,000-dollar) state grant in 2005.
The court had the power to disband the ruling party and hand down five-year political bans for senior figures, including Prime Minister Abhisit Vejjajiva.
Thailand 's Election Commission (EC) in April called for the Democrats -- the country's oldest party -- to be abolished over the accusations, as well as a separate case alleging an undeclared political donation.
The call coincided with the country's worst political violence in decades, which ultimately left more than 90 people dead and almost 1,900 wounded in a series of street clashes between opposition protesters and troops.
"The decision was made when there was pressure, threats against the EC. Protesters carried coffins in front of the building," Democrats' adviser Chuan Leekpai told the court in his closing statement on behalf of the party.
The Democrats were accused of paying 23 million baht to advertising firms, despite having permission to spend only 19 million on billboard marketing.
Prosecutor Kitinan Thuchpramook insisted the EC's complaint was made "with legitimacy and care, with no bias against the party and not under any threat".
"It believes that the party misused the grant and failed to be open about the facts," he told the court in his final comments.
The prime minister was present for the verdict in court, where hundreds of policemen were on hand outside to ensure security.
His party had expressed confidence they would win the case, with Deputy Prime Minister Suthep Thaugsuban saying ahead of the verdict that there was "no contingency plan" in place for a ban.
"The Democrats have been in politics for more than 60 years, everybody is confident," he said.
The party's deputy leader at the time of the alleged grant misuse, Abhisit appeared as a witness for the defence during the trial, telling the court the election body had been informed about changes in campaign plans.
He has also had to defend the Democrats against accusations that a member of his party had attempted to influence the judiciary in the case.
Allegations that a Democrat lawmaker met an aide of a Constitutional Court judge ahead of a hearing in October -- and was captured doing so on video -- were splashed on the front pages of local newspapers.
Three out of the original nine judges later withdrew from the case to pursue legal action against the aide, whom they accuse of leaking the video.
Some observers question whether Abhisit's backers in the military and Bangkok-based elite would allow the Democrats to be toppled.
The party came to power in a parliamentary vote two years ago after court decisions ousted allies of fugitive ex-premier Thaksin Shinawatra, who was himself unseated in a 2006 military coup.
The judiciary forced two premiers from office in 2008 -- one of them, Samak Sundaravej, was removed for taking payments for hosting TV cooking shows.
- AFP /ls
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