In a 16-page ruling, the appeals court ruled that Francis and Vatican prosecutors both made procedural errors that nullified the original indictment and required a new trial.
The court set a June 22 as the date for the new trial to begin.
Defence lawyers said such a ruling was enormously significant if not historic, since it amounted to a Vatican court declaring an act of the pontiff null.
The ruling was a win for the defence and a huge setback to Vatican prosecutors, who have been scrambling to salvage their case.
The prosecution and 2023 convictions against Cardinal Angelo Becciu and others had been held up by Francis as evidence of his willingness to crack down on financial misconduct in the Holy See.
The case had as its main focus the Vatican's investment of 350 million euro ($A568 million) in a London property.
Prosecutors alleged brokers and Vatican monsignors fleeced the Holy See of tens of millions of euros in fees and commissions to acquire the property, and then extorted the Holy See for 15 million euro to cede control of it.
The original investigation spawned two main tangents involving Becciu, once a leading Vatican cardinal and future papal contender.
He was convicted of embezzlement and sentenced to five and a half years in prison.
The tribunal convicted eight other defendants of embezzlement, abuse of office, fraud and other charges.
They all maintained their innocence and appealed.
During the initial trial, Becciu's lawyers in particular had complained that prosecutors had not turned over all the evidence to the defence, violating their right to a fair trial.
Prosecutors had redacted some documents, withheld the mobile phone records of a key prosecution witness and redacted texts among the players, arguing that such omissions were necessary to protect the secrecy of other investigations.
Defence lawyers also alleged that four secret decrees Francis signed giving prosecutors wide-ranging powers to investigate violated the defendants' right to a fair trial.
They only learned about the decrees just before the trial began, since the decrees were never published.
The appeals court agreed with both defence arguments.
In the ruling, the appeals court ruled that one of Francis' decrees amounted to a law, and that Francis' failure to publish it nullified it.
The court also decreed that Vatican prosecutors' failure to turn over to the defence all their evidence nullified their original indictment.
Defence lawyers were pleased by the ruling.
"The historic decision by the Court of Appeals - which, for the first time in Vatican history, ruled that a papal rescript was invalid and void due to failure to publish it - in our view results in the complete nullity of the entire investigation and trial," lawyers Massimo Bassi and Cataldo Intrieri, who represent former Vatican official Fabrizio Tirabassi, said in a statement.
"We are confident that we will be able to reach a swift conclusion to the trial with a largely acquittal verdict."
The tribunal, headed by Archbishop Alejandro Arellano Cedillo, ordered prosecutors to deposit all the documentation "in their original form" by April 30.
It gave the defence until June 15 to prepare their motions before the June 22 start of the new trial.
