The soldiers who all served with the 3rd Parachute Regiment had been accused of killing 18 year old Iraqi civilian Nadhem Abdullah.
It had been alleged the teenager died after an attack on Iraqi civilians in al-Ferkah in southern Iraq in May 2003.
The men were all found not guilty of murder and violent disorder at a court martial in the garrison town of Colchester, southeast England.
Judge Jeff Blackett said the prosecution evidence "could never reach the high standard of proof required to be sure of the guilt of any defendant."
He said it would have been "a miscarriage of justice to blame these seven defendants collectively for that death."
The paratroopers always denied the charges against them.
The trial cost British taxpayers an estimated 10 million pounds (A$23.95m).
Solicitors for the soldiers had complained there was not solid evidence to take the case to trial.
But the Ministry of Defence defended the process, saying soldiers were not above the law.
“The judge made clear that on the basis of the evidence provided very serious allegations had been made and that it was perfectly proper to take the matter to trial,” said a spokesman.
Prosecutor Martin Heslop QC had told the court Mr Abdullah was an "innocent" teenager who died after an "unjustified," "unprovoked" and "gratuitous" attack on him.
Three weeks after "formal hostilities" had ceased, the paratroopers had been in pursuit of a white pick-up truck when they passed a white Toyota containing Mr Abdullah and Athar Saddam, Mr Heslop said.
He alleged the paratroopers had enclosed the vehicle before hauling the deceased and the driver out and attacking them with their “feet, fists, helmets and rifles.”
Blood matching the dead man's DNA was found in a screw recess on one of the servicemen's rifles, it was alleged.
But Justice Blackett said he considered the investigation had been inadequate, particularly in gathering DNA evidence, independent testimony and records.
He also criticised Iraqi witnesses for allegedly using the case to seek blood money from the British government.
"It has become clear to everyone involved as the trial has progressed that the main Iraqi witnesses had colluded to exaggerate and lie about the incident," he said.
This and other "specious" claims about British atrocities should have alerted investigators of the need for independent evidence, the judge said.
"Had the Iraqi witnesses turned out to be credible, then the case would have been stronger."
Human rights groups hit out at the way alleged abuses by British servicemen were handled.
Amnesty International’s director in Britain, Kate Allen said: "We do have longstanding concerns about the way that allegations of abuse by members of the UK armed forces abroad are investigated.
"We urge that for crimes other than purely military offences, the authorities use civilian courts."
Liberty director Shami Chakrabarti said: "Rather than just trying
individuals in these cases, the entire system should be under review to ensure that there is not a culture which would allow the alleged abuses to take place."
The cleared soldiers are Corporal Scott Evans, 32, Private Billy Nerney, 24, Samuel May, 25, Private Morne Vosloo, 26, and former privates Daniel Harding, 25, Roberto Di-Gregorio, 24 and Scott Jackson, 26.
The former privates have left the British Army but were classed as servicemen for the purposes of the hearing.