The regional court in Cologne said it would not try the unnamed pensioner as there was a lack of evidence.
In January he was charged with the murder of 25 people committed by a group, and with aiding and abetting the murder of several hundred people.
Nazi SS troops slaughtered 642 people in the tiny village in western France on June 10, 1944, in the worst World War II crime on French soil. Of the victims 207 were children and 254 were women.
"The court was obliged to examine whether the available evidence would be likely to be sufficient to prove the crimes with which he had been charged, in a trial," it said.
"The court determined with today's decision that this was not the case."
Both the prosecution, as well as the co-plaintiffs representing victims' families, have the right to appeal the ruling within a week.
The accused, who was 19 at the time, had acknowledged that he was in Oradour-sur Glane and a member of the SS but disputed any involvement in the murders.
The male victims were mowed down with machine guns in a barn and those who survived were shot at close range with pistols before the barn was set ablaze.
Prosecutors had said that the suspect then went to the village church where several hundred women and children were being held captive.
Members of the unit used explosives, automatic weapons and hand grenades to kill many of them before setting the church ablaze.
The suspect was accused of abetting the murder either by assuming blockade and surveillance duties within sight of the church or by carrying flammable material to the church, prosecutors said.
Germany reopened the war crimes case into the Oradour-sur-Glane attack in 2010, when a historian discovered documents implicating six suspects in their 80s.
Prosecutors eventually identified 12 members of the regiment who were still alive, after trawling through files of the Stasi secret police in the former communist east that came to light after German reunification in 1990.
Probes were opened against seven of them but none of the other suspects have been charged.
The other five soldiers have already served sentences in France.
Prosecutor Andreas Brendel, head of the central Nazi war crimes investigation unit in the western city of Dortmund, said he was "surprised" by the Cologne court's decision. He said he would consider filing an appeal, although he admitted the evidence in such cases was generally "extremely thin".
The killings came four days after the D-Day landing of Allied troops in Normandy and amid rumours that a Waffen-SS officer had been captured by a unit of the French resistance.
Last year the presidents of Germany and France made a joint visit to Oradour-sur-Glane and joined hands with a survivor of the massacre in a historic moment of reconciliation.
The village has been a ghost town ever since the atrocity, deliberately preserved in its ravaged state as a memorial to those who died.