The president's attorneys plan to appeal.
The court panel voted to strike down a ruling by U.S. District Judge Norma Holloway Johnson that appointed the Justice Department to prosecute Starr's office on the contempt charge.
The appellate judges concluded that Johnson used the wrong standard for determining there was sufficient preliminary evidence of illegal leaks by Starr's office.
The charges had been brought by Clinton lawyer David Kendall, who said Monday he will ask the entire court of appeals to review the case.
"We believe that the decision of the panel is inconsistent with the precedents of the court of appeals," Kendall said.
At issue was an article in The New York Times that disclosed Starr's office had concluded that a sitting president could be indicted. Johnson concluded the disclosure violated grand jury disclosure rules.
The appeals court disagreed. "Internal deliberations of prosecutors that do not directly reveal grand jury proceedings are not Rule 6(e) material," the judges wrote.
That rule bars prosecutors and court personnel from divulging matters and evidence being heard by a grand jury.
"We reverse and remand with instructions to dismiss" the contempt proceedings, the panel ruled in a 3-0 decision.
The appeals court documents disclosed a previously secret ruling by Johnson in which she ordered Starr's office and its former spokesman, Charles Bakaly, to face criminal prosecution by the Justice Department in a single proceeding.
Bakaly left Starr's office in connection with the investigation into the Times story. Johnson had concluded previously that Starr's office was the likely source for 24 other news stories that contained grand jury leaks. Bakaly and Starr have contested the allegations.
On July 14, Johnson concluded that the two matters should be consolidated and Bakaly and Starr should face a joint proceeding in which the Justice Department would "serve as prosecutor of the contempt charges."
Both the Justice Department and Starr immediately objected to Johnson's rulings, according to the appeals court documents.
Justice argued there was no factual basis for including the independent counsel's office in a proceeding against Bakaly.
And Starr lodged several objections, including that the material in the Times article was not covered by grand jury secrecy and that his office should be covered by "federal sovereign immunity."
The appeals court panel did not rule on the immunity issue, instead overturning the judge's ruling on grounds that the information in the allaged leak was not covered by grand jury secrecy rules.
Though the impeachment investigation is long over, Johnson's investigation into alleged leaks remains a concern for the embattled independent counsel's office. The prosecutors want to clear their names and avoid possible penalties, including fines or action against their law licenses.