The ruling sparked an angry reaction from the Corrie family, with Rachel's mother, Cindy Corrie, accusing the Israeli authorities of a cover-up.
"The state has worked extremely hard to make sure that the full truth about what happened to my daughter is not exposed and that those responsible for the killing are not held accountable," she told reporters after the hearing.
And a British peace activist who witnessed her death first hand, insisted it was "inconceivable" that the driver of the bulldozer did not see her, as found by the judge.
"I reached the conclusion that there was no negligence on the part of the bulldozer driver," said Judge Oded Gershon at the District Court in the northern city of Haifa.
Corrie's death, he said, was the result of "an accident she brought upon herself."
"The deceased put herself into a dangerous situation, she stood in front of a giant bulldozer in a place where the operator could not see her. She did not distance herself as a reasonable person would have done," he said.
According to eyewitness accounts, the 23-year-old was killed by a military bulldozer in Rafah in the southern Gaza Strip on March 16, 2003.
At the time, she was acting as a human shield with a group of activists from the pro-Palestinian International Solidarity Movement to prevent troops from demolishing a house.
The verdict echoed the findings of an internal investigation by the Israeli military in 2003 which was concluded just four weeks after her death and cleared troops of any responsibility, saying the bulldozer crew did not see Corrie.
Following the hearing, the family vowed to appeal to the Supreme Court.
"The verdict is based upon distorted facts and could have been written by the state's attorney," their lawyer Hussein Abu Hussein told reporters as Corrie's father Craig stood by stony-face while her mother looked heartbroken and close to tears, an AFP correspondent said.
Cindy Corrie said the family was "deeply saddened and deeply troubled" over the verdict.
"We believe that Rachel's death could and should have been avoided," said the white-haired American, her voice breaking with emotion. "We knew from the beginning that a civil suit would be an uphill battle.
"This was a bad day, not only for the family, but a bad day for human rights, for humanity, for the rule of law and for the country of Israel," she said.
Tom Dale, a former ISM activist who was 10 metres (33 feet) away when Corrie was crushed, insisted it was not possible that the driver did not see her.
"On 16 March 2003, Rachel could not have been more visible: standing, on a clear day, in the open ground, wearing a high-visibility vest," he said in a statement emailed to AFP.
"It is inconceivable that at some point the driver did not see her, given the distance from which he approached, while she stood, unmoving, in front of it.
"Just before she was crushed, Rachel briefly stood on top of the rolling mound of earth which had gathered in front of the bulldozer: her head was above the level of the blade, and just a few metres from the driver."
Anyone familiar with the situation in the occupied Palestinian territories was unlikely to be surprised by this verdict, "which reflects a long-standing culture of impunity for the Israeli military," he said.
Craig Corrie expressed similar sentiments.
"We've seen from the highest levels of the military that they thought they could kill people on that border with impunity," he said.
The family first launched their civil action in 2005, for a symbolic sum of $1, plus costs, but court hearings only began in March 2010.
Senior Palestinian official Hanan Ashrawi denounced the verdict as "a miscarriage of justice" and said the judge had ignored "overwhelming proof that Rachel was deliberately murdered."
"This proves that once again, the occupation has distorted the legal and judicial systems in Israel, and that the lack of accountability for its violence and violations has generated a culture of hate and impunity," Ashrawi said in a strongly-worded statement.
She also lashed out at Washington over its "deafening" silence on the matter, saying it made the US administration complicit in Israel's crimes.
"In their lack of engagement and human empathy, both the legislative and executive branches are complicit in compounding the crime," Ashrawi charged.
Fawzi Barhoum, a spokesman for Hamas which currently rules the Gaza Strip, told AFP that "we in Hamas severely condemn this unjust Zionist decision that exonerates murderers. It would be a victory for the wild crimes perfected by its soldiers and leaders."
A spokesman for Israeli Prime Minister Benjamin Netanyahu called Corrie's death "an unnecessary tragedy," but said the court ruled in accordance with the evidence that "the Israeli side was not responsible, and on the contrary, if there was irresponsible behaviour -- it was by the activists."
He also rejected the criticism leveled by Corrie's family against the Israeli legal system.
"Though I understand their pain, their criticisms of the Israeli justice system are not objective and are not factual," he said. "In Israel the judiciary is fiercely independent, there are numerous cases where the judicial branch rules against the executive branch."
Corrie was killed at the height of the second intifada, or uprising (2000-2005) and quickly became an symbol of foreign support for the Palestinian cause and the subject of a 2005 play based on her emails and diary.