The Hamburg state court said the 93-year-old Engel will not have to serve the sentence, even though the judge described the killings as "cruel."
Prosecutors said the captives were bound in pairs and forced to walk onto a plank over an open grave where they were shot. The May 1944 shootings at a mountain pass outside Genoa were in retaliation for an attack by Italian partisans on a movie theater that killed five German soldiers.
A neatly dressed man who walks with the help of cane, Engel appeared unmoved as the verdict was read. He denied the charges and blamed Nazi naval officers who carried out the shootings at the Turchino Pass.
Prosecutors sought life imprisonment for Engel but the court issued a lesser sentence, given the "exceptional circumstances" created by the long interval since the crimes and a spotty witness testimony.
"It was a cruel and illegal killing, which Engel helped bring about," said Judge Rolf Seedorf.
Seedorf rejected Engel's argument that naval personnel who guarded the transport from Genoa's Marassi jail and carried out the shootings on Turchino Pass bore the main responsibility, noting that Engel was the highest-ranking officer present.
"Why was your presence at the site required if it was a matter for the navy?" the judge said. "You were the highest-ranking person at the site, and therefore in charge. So one must conclude that events unfolded the way you had imagined, and, I might add, to your satisfaction."
The court based its findings on witness accounts, including those of several former German military officers, and historical records presented during the trial, which opened May 7.
At the time of the massacre, Engel headed the Genoa branch of an SS intelligence unit charged with tracking enemies of the Nazis. He testified he approved the list of prisoners from Genoa's Marassi jail to be shot and was present during the killings, but did not order the massacre or shoot anyone himself.
However, a former member of the German Navy, Walter Emig, told the court that Engel "clearly had the job of supervising the killings" and at one point ordered a lieutenant to shoot a captive who was not yet dead. Prosecutor Jochen Kuhlmann argued that the SS would not have allowed such an operation to be handed off to anyone else.
Engel's lawyer pleaded for acquittal, pointing out that the Hamburg court last week upheld arguments that such reprisal killings were not explicitly outlawed under rules of war in 1944. The lawyer, Udo Kneip, argued that the prisoners died an "honorable death."
That argument, however, also was rejected.
Engel appeared attentive during the trial and in an interview with The Associated Press, he argued that the partisans provoked the Nazis with "treacherous, underhanded attacks" and cited an alleged order from Adolf Hitler to retaliate massively against attacks on German forces in Italy.
Hamburg authorities investigated Engel in 1969 for his role in Nazi executions in Italy. The case was dropped the same year for reasons that are not known because the files were lost.
But an Italian military court convicted him in absentia in 1999 and sentenced him to life in prison for war crimes connected to a total of 246 deaths.
Italy pressed for Engel's trial after a German television documentary last year drew attention to his case and the fact that he had been living for decades in Hamburg.
The special German prosecutors' office that has hunted Nazis since 1958 has said up to 20 more trials for Nazi-era crimes still are possible as new archive material becomes available and strengthens cases.