Kate and Gerry McCann sued ex-police chief Goncalo Amaral, who led the search for their daughter, following claims he made about them in his book.
The verdict means his book criticising the McCanns can now be sold again.
They were awarded Â£358,000 damages by a Portuguese court after the libel case. They plan to challenge the new ruling.
Last year a court ruled against Mr Amaral, the retired detective who first led the investigation into three-year-old Madeleine's disappearance from a holiday apartment in the Algarve in 2007.
It ordered the seizure of all copies of a book he wrote suggesting that Kate and Gerry McCann were involved in Madeleine's disappearance.
On winning that libel action, Mr and Mrs McCann pledged to plough the 500,000 euros awarded to them into the search for their daughter.
They welcomed the accompanying ban on the book which they said was undermining that search.
After the appeal court decision, the book is now set to be back on the shelves soon.
In a statement, its publisher welcomed the verdict, noting that it cited Mr Amaral's constitutional right to express his opinion.
A lawyer for the McCanns said they intended to appeal against the latest decision and seek to bring the case before Portugal's Supreme Court.
A retired police officer in Portugal has won his appeal against a court ruling that he libelled the parents of Madeleine McCann.