Three army officers and a priest were sentenced last year to between 20 and 30 years in prison for the killing of the bishop, a renowned human rights campaigner.
But on Tuesday, a judge accepted an appeal by the defence saying the first trial was flawed because of irregularities in the testimony of a key witness.
That trial had been seen as a test of Guatemala's justice system by human rights activists, who believed the murder was carried out on the highest orders.
Bishop Gerardi, head of the church's human rights office, was bludgeoned to death in April 1998, days after presenting a report blaming the military for almost all the atrocities committed during Guatemala's 36-year civil war.
Testimony questioned
The trial began in March 2001 and several judges and prosecutors fled the country after receiving death threats.
In June that year, the judges convicted the former military intelligence chief, Colonel Byron Lima Estrada, who prosecutors accused of masterminding the killing.
He was sentenced along with his son, Captain Byron Lima Oliva and Jose Obdulio Villanueva, both members of the presidential guard.
Gerardi's assistant, Reverend Mario Orantes, was found guilty of acting as an accomplice, and the bishop's cook.
The court said it based its ruling largely on the testimony of the key prosecution witness, Ruben Chanax, a homeless man who claimed he had been hired by the officers.
Overturning the verdict on Tuesday, appeals judge Wilevaldo Contreras said the court had not adequately verified Mr Chanax testimony.
During last year's trial, Mr Chanax said he had been told to spy on Bishop Gerardi, and to alter the scene of the crime before the police arrived.
He told the court he had been warned that someone would die.
At least 150,000 people are believed to have been killed in Guatemala's civil war, and more than 50,000 disappeared, but so far most of the crimes have gone unpunished.