Tom DeLay was convicted in 2010 of illegally funnelling corporate money to Texas Republican political candidates.
By 2-1, the Third Circuit Court of Appeals overturned the jury verdict, ruling prosecutors failed to prove the funds were "tainted".
Mr DeLay, first elected to Congress in 1984, rose to majority leader in 2003.
Known as "the hammer", Mr DeLay was renowned for his ability to keep the Republican caucus firmly on the party line in close votes.
The Texas congressman and former pest control magnate resigned in June 2006 following his indictment on charges of money laundering and conspiracy to commit money laundering.
Federal prosecutors said that during the 2002 mid-term election campaign, Mr DeLay's aides took $190,000 (Â£121,935) donated by corporate lobbyists to a campaign committee he controlled and gave it to an arm of the Republican National Committee.
That group then distributed the funds to seven state legislative candidates.
Six of those candidates won, giving the Republican Party control of the Texas House of Representatives, which later pushed through a redistricting plan that sent more Republicans to Washington in 2004, solidifying Mr DeLay's hold on power.
Mr DeLay contended the swap was legal and that no corporate money was given to state-level candidates. He denounced the prosecution as a political vendetta.
A Texas jury convicted him in November 2010. The following January he was sentenced to three years in prison but was allowed to remain free pending appeal.
On Thursday, the appeals court ruled that the prosecution had "failed in its burden to prove that the funds that were delivered to the seven candidates were ever tainted".
Mr DeLay's attorney, Brian Wice, told the Associated Press Mr DeLay felt vindicated.
"He's ecstatic. He's gratified. He's just a little bit numb," he said. "I'm hoping with today's victory, he will be able to resume his life as he once knew it."
A US appeals court has overturned the money laundering conviction of a once-powerful former Republican congressman, citing insufficient evidence.