The High Court said he can't be found guilty based on the evidence presented.
"On basis of evidences produced by the prosecution, the appellant cannot be convicted, no matter how differently the common man thinks," the court said.
Khan, one of India's most bankable stars, was sentenced
by a lower court on May 6 to five years in prison for allegedly running over several men sleeping on a Mumbai pavement, and killing one of them.
The high court's decision will undoubtedly be welcome news to the Indian film industry. His absence could have cost the industry more than $31 million, trade analysts say.
The 49-year-old Khan's stature in Bollywood can't be overstated. He is Tom Cruise, Brad Pitt and George Clooney rolled into one -- oozing sex appeal and machismo in the more than 80 movies he's starred in.
In its list of the best looking man in the world, People Magazine once placed him at no. 7. He has a rabid fan base (with 15 million Twitter followers), and has enjoyed an unheard-of two-decade reign at the top.
The hit and run
The hit-and-run incident took place outside a Mumbai bakery more than 12 years ago, in September 2002.
Prosecutors said Khan ran over five sleeping men after losing control of his sports utility vehicle. He was returning from a bar after a night of drinking, they said.
One of the victims was killed; the others injured.
The actor contended he wasn't the driver. Prosecutors said he left the scene after the crash.
The High Court questioned the account of Khan's bodyguard, a key prosecution witness. The bodyguard, Ravindra Patil, was the one who told authorities Khan was driving drunk.
Patil died in 2007.
"Ravindra Patil cannot be considered a wholly reliable witness," the court said.