Ms Khobragade, who was India’s deputy consul-general in New York, was arrested on December 12 outside her children’s school.
She was indicted in January for visa fraud and making false statements on her Indian housekeeper Sangeeta Richard’s visa application.
US judge Shira Scheindlin dismissed the case Wednesday on grounds that Ms Khobragade was granted full diplomatic immunity on January 8, when she was named a counselor to India’s mission to the UN.
“Even if Khobragade had no immunity at the time of her arrest and has none now, her acquisition of immunity during the pendency of proceedings mandates dismissal,” the judge wrote.
The ruling leaves open the possibility of new indictment against the diplomat, say federal prosecutors.
Ms Khobragade’s lawyer Daniel Arshack said his client was pleased that law had prevailed. “Technically, the prosecution remains free to re-indict Dr. Khobragade. However, the decision to do so would be viewed as an aggressive and unnecessary act,” he added.
The 39-year-old diplomat, who was forced to fly out of the US in January, leaving her two young children, is now working for the foreign affairs ministry in Delhi.
Her arrest and humiliation provoked an outcry in India, setting off reprisals against US diplomats and the removal of some security barriers near the US embassy there.
It also led to the postponement of trips by US officials and business executives to India, with which the United States was working to strengthen ties.
“We are happy. We have always said the case is completely false,” said the diplomat’s father Uttam Khobragade. “Sangeetha Richards made such false statements to remain in the US. They tried to frame Devyani.”