Handing down her judgement at the Gauteng High Court in Pretoria, Judge Thokozile Masipa said the court accepted Pistorius's version that he did not intentionally shoot Steenkamp but mistook her for an intruder on Feb 14 last year, Xinhua reported.
Masipa said the prosecution failed to prove beyond reasonable doubt that the accused was guilty of premeditated murder. This was despite the judge's earlier admission that Pistorius was a poor witness who contradicted himself.
"This court does not support the state contention that this could be a case of dolus eventualis (legal intent).
"On the contrary the evidence shows that from the onset the accused believed that at the time that he fired shots into the toilet door, the deceased was in the bedroom while the intruders were in the toilet," Masipa ruled.
Pistorius, who was already sobbing, breathed a big sigh of relief, when Masipa exonerated him from the premeditated murder charge.
She pronounced, "It follows that the accused's erroneous belief that his life was in danger exclus dolus. The accused therefore cannot be found guilty of murder dolus eventualis."
The judge dismissed most of the witnesses' evidence, saying it was largely speculation as they were not on the scene. She also said text messages that showed Pistorius and Reeva fought sometimes, were not helpful to the court.
She, however, found that Pistorius was negligent in the way he acted that fateful night. Masipa said Pistorius did not act like a reasonable man when he went on to fire four shots through the locked bathroom door, without calling the police, the security guards or at least screaming for help.
Nevertheless, her verdict on the murder charge has left a lot of women furious. Kensani Mutele, one of the women who picketed in front of court in support of a harsher sentence for Pistorius, expressed great disappointment.
Kensani told Xinhua: "Oscar must go to jail. What he did was wrong. If you are wrong you must be punished and this is what should happen to him."
Elizabeth Thabethe was both disappointed and furious.
"Now what must we do as women? Men are killing women and go scotfree. The man who killed Reeva must rot in jail," she said.
However, one woman, Lena Von Brandis, said the judge's verdict on the murder charge was good news.
"I support Oscar Pistorius because I believe he is innocent and not guilty. He has always been my hero and I believe him.
"My wish is that he will just calm down, be himself and not stress because god is with him," said Von Brandis.
The court was adjourned to Friday when judge Masipa is expected to finish handing down her judgement. Now that the murder verdict is no longer a possibility, Pistorius could either be found guilty of culpable homicide or be found not guilty.
After the verdict, Pistorius was seen sobbing and hugging his siblings and other relatives in relief.
However, the judge will still have to go further to give her verdict on Pistorius's other three charges of contravening the fire arms act.