Prosecutors said the gnome was ridiculing Nazism
German prosecutors have decided to take no action against an artist who created a garden gnome raising its right arm in a Nazi salute.
They say the gold-painted gnome was mocking the Nazis rather than promoting their return.
However, the prosecutors in Nuremburg, Bavaria, warned against any attempt to copy the idea behind the exhibit.
Nazi symbols and Hitler salutes have been illegal in Germany since the end of World War II.
Artist Ottmar Hoerl, 59, became embroiled in the row when one of his "Nazi" gnomes was put on display at a Nuremburg art gallery earlier this month.
But after a preliminary inquiry, city prosecutors have ruled that the 40cm (15in) statue was poking fun at Nazism, rather than promoting it and therefore was not illegal.
The prosecutors quoted Mr Hoerl as saying: "It is pretty clear that garden gnomes are silly and that they do silly things. In 1942 I would have been shot by the Nazis for this."
Although Nazi salutes and symbols are illegal in Germany, prosecutors said they could be allowed if they were clearly used to counter the fascist ideology.
However, they added that gnomes had a "certain abuse potential" and said no-one should try to emulate Mr Hoerl's work.
Mr Hoerl has been president of Nuremberg's Academy of Fine Arts since 2005.
Before the ruling, he said he didn't know what all the fuss was about.
He has also exhibited golden "Nazi" gnomes in Belgium, Italy and in Aschaffenburg, Germany.
Nuremberg is particularly sensitive about the Nazi era as it was the scene of huge rallies by Hitler and also where the trials of leading Nazis took place after the war.