Following the ruling, Lee said the decision by the Seoul High Court vindicated him completely and proved the case was politically motivated.
"It is truly outrageous that all this energy and national resources were spent for what is an obvious outcome," he said on Wednesday.
Lee was handed a one-year prison term suspended for two years by the Seoul Central District Court in 2024, a penalty that if it had been upheld would have jeopardised his bid to run in the next presidential election.
The appeals court reversed a lower court's ruling that had found Lee guilty of making a false claim during a parliamentary audit in 2021 while running as a presidential candidate about a land development project in Seongnam where he served as mayor.
The court cases have shone a spotlight on Lee since opinion polls show he is the frontrunner to replace President Yoon Suk-yeol if the embattled leader's impeachment is upheld.
South Korea will hold a snap election within 60 days if the Constitutional Court upholds the impeachment of Yoon over his short-lived declaration of martial law in December.
The leader of the main opposition Democratic Party is regarded as by far the top contender for the next presidential election but faces legal challenges.
It was unclear if the prosecution would decide to appeal Wednesday's court decision at the Supreme Court.
As well as the election law violation case, he also faces several other trials on matters ranging from bribery to charges mostly linked to a $US1 billion property development scandal.
In South Korea, if MPs are convicted of violating the election law and given a fine of one million won ($A1000) or more or even a suspended sentence and the conviction becomes finalised, they are barred from running for elections for at least five years and stripped of their parliament seat.
Lee, 61, ran against Yoon in the 2022 presidential election and lost by the slimmest margin in South Korea's history.
In 2024, he survived a knife attack when he was stabbed in the neck by a man during an event and underwent surgery.
