The Milan court unexpectedly threw out the guilty verdict handed down by a lower tribunal last year, which had sentenced Berlusconi to seven years in jail and banned him from holding public office.
Berlusconi was accused of paying for sex with former nightclub dancer Kharima El Mahroug, better known under her stage name "Ruby the Heartstealer", when she was under 18, and of abusing his authority to get her released from police custody over unrelated theft accusations.
In a brief statement read out in court, the judges fully acquitted 77-year-old Berlusconi on both charges. They will release their motivations in 90 days.
"A verdict that goes beyond our rosiest expectations," Berlusconi's lawyer Franco Coppi told reporters.
The four-times prime minister, still the most influential politician on the centre-right, had always denied the charges, accusing the Milan magistrates of hounding him for political reasons.
"Finally justice has been done," said Simone Furlan of Berlusconi's Forza Italia party in a statement. "Now, let's all focus on good politics to relaunch Forza Italia, tightly knit around our great leader Silvio Berlusconi."
Friday's verdict is not definitive as prosecutors could lodge an appeal with Italy's top court.
The final ruling in the so-called Ruby trial could have implications for Berlusconi and his freedom to engage in political activity beyond the case itself.
As well as its implications for Berlusconi, the verdict removes a potential threat to Prime Minister Matteo Renzi's constitutional reform drive, which depends on an accord with the centre-right. That accord could have been threatened had Berlusconi's conviction been upheld.
Berlusconi received a definitive conviction for tax fraud last year and was stripped of his seat in parliament.