Luigi Cascioli, a 72-year-old retired agronomist, had accused the Rev. Enrico Righi of violating two laws with the assertion, which he called a deceptive fable propagated by the Roman Catholic Church.
"The Rev. Righi is very satisfied and moved," Righi's attorney, Severo Bruno, said. "He is an old, small-town parish priest who never would have thought he'd be in the spotlight for something like this."
Cascioli, a former schoolmate of Righi's, said he had not expected the case to succeed in overwhelmingly Roman Catholic Italy.
"This is not surprising but it doesn't mean it all ends here," he said, adding that he's considering taking the case to the European Court of Human Rights.
"This is an important case and it deserves to go ahead," he said.
Judge Gaetano Mautone said in his decision that prosecutors should investigate Cascioli for possible slander.
The ruling was released Thursday in Viterbo, a town north of Rome where the priest is based. Cascioli filed a criminal complaint against Righi in 2002 after Righi wrote in a parish bulletin that Jesus existed, that he was born to a couple named Mary and Joseph in Bethlehem and that he lived in Nazareth.
Righi, 76, said substantial historical evidence proves Jesus' existence.
Cascioli claimed that Righi's assertions violated two Italian laws: one barring "abuse of popular belief," or fraudulently deceiving people; and another barring "impersonation" or personal gain from attributing a false name to someone.