The attack strained Baghdad's relations with the US
A US federal judge has dismissed all charges against five guards from US security firm Blackwater over the killing of 17 Iraqis in 2007.
The five, contracted to defend US diplomatic personnel, were accused of opening fire on a crowd in Baghdad.
District Judge Ricardo Urbina said the US justice department had used inadmissible evidence.
The five had all pleaded not guilty to manslaughter. A sixth guard admitted killing at least one Iraqi.
The killings, which took place in Nisoor Square, Baghdad, strained Iraq's relationship with the US and raised questions about US contractors operating in war zones.
Lawyers for the five guards say they were acting in self-defence, but witnesses and family members of those killed maintain that the shooting on 16 September 2007 was unprovoked.
The disputed evidence concerned statements the guards were compelled to give to state department investigators.
As these statements would have been self-incriminating, they were therefore protected under the Fifth Amendment of the US Constitution. Prosecutors should therefore have built their case against the men without them.
Judge Urbina wrote in his ruling that the arguments by prosecutors and investigators that they had not used the defendants' compelled testimony to make their case "were all too often contradictory, unbelievable and lacking in credibility".
Justice department spokesman Dean Boyd told the Associated Press news agency: "We're obviously disappointed by the decision. We're still in the process of reviewing the opinion and considering our options."
Here's a guy that's a decorated war hero who we maintain should never have been charged in the first place
Lawyer for Donald Ball
The five guards were Donald Ball, Dustin Heard, Evan Liberty, Nick Slatten and Paul Slough - all of whom are decorated military veterans.
As well as the 14 counts of manslaughter, they had faced 20 counts of attempted manslaughter and one count of using a machine gun to commit a crime of violence, a charge that carries a 30-year minimum sentence.
Their lawyers said the men were thrilled by the ruling.
"It's tremendously gratifying to see the court allow us to celebrate the new year the way it has," said Bill Coffield, who represents Mr Liberty. "It really invigorates your belief in our court system."
Donald Ball's lawyer, Steven McCool, said it felt like the "weight of the world" had been lifted from his client's shoulders.
"Here's a guy that's a decorated war hero who we maintain should never have been charged in the first place," he said.
A sixth Blackwater employee, Jeremy Ridgeway, had agreed to a plea deal in return for testifying against his colleagues.
7 January 2010: Story corrected to remove reference to an immunity deal and to make it clear that the judge's ruling referred to the compulsory testimony, and that they use of such testimony was in violation of the Fifth Amendment against self-incrimination.