Prosecutors at Sonoma Supreme Court in northern California dropped the charges after they decided they could not prove the 41-year-old had used a computer pivotal to the case.
Judge Rene Chouteau ordered Mr Karr released immediately.
"I don't think this case should have ever been brought, based on the evidence," Mr Karr's attorney Rob Amparan told reporters.
Mr Karr, who earned worldwide media attention in August after he dramatically confessed to the 1996 murder six-year-old Ramsey, had been accused of possessing child porn in charges that dated back to 2001.
He was sent to California to face the five-year-old charges after DNA tests in Colorado ruled him out as a suspect in the Ramsey case following his extradition from Thailand.
But the child porn case had been riddled with problems since court proceedings began.
Prosecutors last week revealed that the computer on which Mr Karr was alleged to have stored pornographic images in 2001 had been lost.
The court allowed the case to proceed after prosecutors said they had recovered a back-up hard drive containing the key evidence.
But prosecutors acknowledged they could not prove that Mr Karr had actually used the computer in the year before it was seized from his home, following testimony from his ex-wife.
A statement from the Sonoma District Attorney's office said while it was proven that child pornography had been found on the computer, it was not possible to establish when it had been downloaded or accessed by Mr Karr.
District Attorney Stephan Passalacqua said Mr Karr had benefited from fleeing California after being charged in 2001.
"We exhausted all resources available in an attempt to have Mr Karr register as a sex offender for life," he said.