The case before the court concerned the sentencing of Tymoshenko to seven years in prison in October 2011 after being convicted of exceeding her powers as premier while negotiating a gas contract with Russia.
The court unanimously agreed Tymoshenko's jailing was "for other reasons" than those permissible by law.
Tymoshenko has said her conviction and sentencing was intended to keep her out of politics.
The court found her prosecution has nothing to do with the law or democratic standards.
Tymoshenko's lawyer has called for her to be freed immediately.
It is unclear if the decision by the European court will be legally binding in Ukraine. Opponents of the judgment have three months to request that the case be referred to the Grand Chamber of the Court.
Tymoshenko was an architect of Ukraine's 2004 pro-democracy Orange Revolution.