The case began in 2010 and became symbolic of perceived corruption among Spain's elites, including the royals.
The ruling said: "We must acquit and we are acquitting Cristina Federica. of tax fraud, of which she was accused".
The trial centred on accusations that Urdangarin used his former title, the Duke of Palma, to embezzle about $6.6 million in public funds for the non-profit organisation, the Noos Foundation. But a panel of judges ruled that she must pay fines of almost 265,000 euros (more than $280,000) because she benefited indirectly from crime.
Cristina's husband, Inaki Urdangarin, was sentenced to over six years in prison on charges including fraud and tax evasion, while the princess was ordered to pay a fine of €265,000 ($282,000) because she had benefited from her husband's wrongdoing.
The case can be appealed in the Supreme Court, but it was not clear whether Urdangarin would choose to do so. Torres was given an eight-and-a-half year sentence.
Spanish princess found not guilty, husband sentenced to six years for embezzlement
When King Felipe VI ascended the throne in 2014, he removed Cristina and her sister Elena from royal duties as part of a modernisation of the monarchy.
The royal family did not comment on the ruling, though the place expressed its "greatest respect for the independence of the judiciary".
Inigo Mendez de Vigo, the minister who speaks for Prime Minister Mariano Rajoy's conservative government, said Friday that it "shows that nobody is above the law and that the rule of law works".
Prosecutors will seek immediate prison for Urdangarin and for Diego Torres, his partner at Noos, El Pais reported. Among the companies used by the institute to hide funds was Aizoon, a real estate consulting company jointly owned by Cristina and Urdangarin that paid for family holidays and wine bills, according to court documents. Following their nuptials, the couple went on to have four children together - daughter Irene and sons Juan, Pablo and Miguel. "She believes his conviction is unjust, because she has always believed - and still believes - that he is innocent", Roca told reporters in Barcelona.More news: Michael Floyd's DUI guilty plea could lead to enhanced suspension