Much like the district court before it, the appeal court ruled that Östersund was not liable to pay the SEK 6 million in fines sought by the prosecution.
In 2010, the municipal drinking water made around 27,000 people ill with upset stomachs and left the water undrinkable unless it was boiled. It took roughly three months before the water was deemed safe to drink again.
Tests on the water system revealed high levels of cryptosporidium, a microscopic parasite that can cause severe gastrointestinal problems.
The city discovered the source of the outbreak stemmed from a sewage pipe at a residential building that had been accidentally connected to a rain water pipe.
Prosecutors alleged the municipality committed environmental crimes by failing to deliver clean drinking water as required by national drinking water regulations.
Although the outbreak was a serious event, the court could find no criminal wrongdoing and says Östersund had sufficient controls in place to prevent contamination.
The prosecution has until later next month to appeal the decision to Sweden's Supreme Court.