The five workers, contracted to defend US diplomatic personnel, were accused of opening fire in a crowded square in Baghdad.
But US District Judge Ricardo Urbina said on Thursday that the US Justice Department had overstepped its bounds and wrongly used evidence it was not allowed to see.
He said the government's explanations have been contradictory and unbelievable.
Blackwater contractors were hired to guard State Department diplomats in Iraq. Prosecutors said the guards fired on unarmed civilians in Nisoor Square in 2007, killing innocent people.
The judge's ruling does not say whether the shooting was proper, only that prosecutors improperly used evidence to build their case. After the shooting, the guards gave statements to State Department investigators. Investigators promised the men that their statements were only to be used for the internal inquiry and would not be used in a criminal case. Such limited immunity deals are common in police departments so officers involved in shootings cannot hold up internal investigations by refusing to cooperate.
The five had all pleaded non guilty to manslaughter. A sixth guard admitted killing at least one Iraqi.
Lawyers for the five guards said they had been acting in self-defence, but witnesses said the shooting was unprovoked.
