Ernesto Rojas Abbate was arrested in October 2010 after posting footage of himself wearing a devil mask and tearing pages from the Islamic holy book before setting it on fire and later urinating on it to extinguish the flames.
Prosecutors, who had been seeking a three-month suspended sentence and 1,000 euro ($1,400) fine, appealed after a court acquitted him in May on charges of inciting racial hatred.
In the footage Rojas Abbate, a 31-year-old resident of a suburb of the eastern city of Strasbourg, used pages of the Quran as a prop in a simulation of the September 11, 2001, attacks on New York.
He made paper airplanes from pages of the Quran , threw them at glasses meant to represent the twin towers of the World Trade Centre, then burned the pages and the book before urinating on them.
The appeals court ruled that, while the video was "wilfully outrageous and deliberately provocative", there was no evidence Rojas Abbate had intended "to arouse feelings of hostility... aimed at provoking discrimination, hate, or violence towards Muslims."
His lawyer, Renaud Bettcher, hailed the ruling, saying: "In a secular and republican society, it is incomprehensible that my client was prosecuted. Blasphemy does not exist in France."
Police arrested Rojas Abbate after local Muslim leaders in Strasbourg reacted with outrage at the video.