Judge Jeanette Traverso said the evidence presented by the prosecution fell “far below the threshold” of what a reasonable court could convict on.
She said the evidence of the prosecution’s main witness was “riddled with contradictions”.
Anni Dewani’s family said they had been failed by the justice system.
Announcing her ruling, the judge said the only reason not to grant the application would be in the hope that Shrien Dewani would implicate himself if he gave evidence.
Shrien Dewani, a 34-year-old British business, was extradited to South Africa this year to face trial accused of planning the murder of his wife in November 2010.
He listened intently as key evidence against him was criticized by the judge as she gave her ruling over almost three hours.
Shrien Dewani went straight down to the cells to prepare for his release, following the decision, as his family embraced.
It is believed he left the court, without making a comment, through a side entrance.
Shrien Dewani’s family, who had said it would it be a “nightmare” if the trial did not continue, immediately left the court room.
They bowed their heads amid shouting from the public gallery.
Her uncle, Ashok Hindocha said the family would be going through the case with their lawyers to confirm whether they can file a lawsuit against Shrien Dewani in the UK.
The judge ruled it was not necessary for Shrien Dewani to give evidence, saying a defendant was entitled to be discharged if there was no possibility of conviction unless he entered the witness box and incriminated himself.
The judge said the evidence from the three criminals already convicted over Anni Dewani’s murder was “so improbable, with so many mistakes, lies and inconsistencies you cannot see where the lies ended and the truth begins”.
Shrien Dewani has always denied plotting with others to murder his bride, who was found shot dead in the back of their taxi after the couple were hijacked during a late-night tour of a township.
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