Predominantly ethnic-Albanian Kosovo declared independence from Serbia in 2008.
The arrest has further strained the ties between Serbia and Kosovo.
Belgrade wants to try him for war crimes in connection with his role in the insurgency in its former southern province of Kosovo.
Serbian Prime Minister Aleksandar Vučić on Thursday called an urgent government meeting over Haradinaj's release.
Upon his release following the ruling on April 27, Haradinaj said the procedure is now closed and Serbia's extradition request has been turned down.
The court reasoned its decision on the grounds that Haradinaj would not receive a fair and balanced trial in Serbia, The Associated Press quotes his lawyer Rachel Lindon as saying.
A statement from the government in Pristina said the decision confirmed that Serbian arrest warrants against Haradinaj and other KLA fighters "are political and have low intentions".
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After leaving the court building, Haradinaj, who is now the leader of the Alliance for the Future of Kosovo, said the court decision was a "victory for Albanians".
Serbia has accused the former Kosovo Liberation Army commander of overseeing a campaign of torture and murder against ethnic Serbs during the 1998-99 conflict. A French court has refused to extradite Haradinaj to Serbia to face war crimes charges.
The public prosecutor's office has five days to lodge an appeal, she added.
Haradinaj, 48, has been tried twice and acquitted of war crimes at the International Criminal Tribunal for the former Yugoslavia in The Hague.
The Kosovo conflict ended after North Atlantic Treaty Organisation bombed the now-defunct Yugoslavia, comprised of Serbia and Montenegro, for 78 days to force a pullout of its troops and end a counter-insurgency campaign against ethnic Albanians.