Italy had appealed against a decision by former Brazilian President Lula da Silva to deny an extradition request.
But the Supreme Court ruled the Italy lacked legal standing to challenge the decision.
Battisti, 56, escaped from an Italian prison, where he was awaiting trial on four murder charges, which he has always denied.
The nine Supreme Court judges voted 6-3 to refuse Italy's attempt to appeal, and ordered that Battisti should be freed.
"At stake here is national sovereignty. It is as simple as that," said Judge Luiz Fux, one of the nine.
Years on the run
Cesare Battisti says he is the victim of political persecution in Italy.
He has been on the run since escaping from an Italian jail in 1981 while awaiting trial, and was convicted of murder in absentia in 1990.
He spent many years in France - where he started a career as a novelist - before moving to Mexico and finally Brazil, where he was arrested in 2007.
Last year, the Brazilian government accepted Mr Battisti's request for political asylum, but the supreme court ruled the designation was illegal as he was convicted of "common crimes" rather than political acts.
Former President Lula's decision to refuse the Italian extradition request, a day before he left office in January, caused fury in Italy, which withdrew its ambassador.
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