The Court of Arbitration for Sport (CAS) says it is referring the case back to the International Judo Federation which imposed the ban in October 2019. The ruling leaves Iranian judokas free to take part in the rearranged Tokyo Olympics this year.
Sport's top court cancelled the suspension of the Iranian judo federation, imposed after it ordered judoka Saeid Mollaei not to fight against an Israeli.
The Court of Arbitration for Sport (CAS) on Monday said it was referring the case back to the International Judo Federation which imposed the ban in October 2019.
CAS said the Iranian federation had "committed severe violations" of the international federation rules and should be punished accordingly.
"However, the CAS Panel concluded that the kind of sanction (unlimited suspension) imposed in the challenged decision of 22 October 2019 had no legal basis in the IJF regulations," said the press statement.
In the meantime, the ruling leaves Iranian judokas free to take part in the rearranged Tokyo Olympics this year.
The Iranian federation hailed a "great victory" and said it hoped the decision would lead to an "improvement" in relations with the International Judo Federation.
Mollaei, a former world champion who now competes for Mongolia, claimed he was ordered by the Iranian federation to throw a match to avoid combat with the Israeli Sagi Muki, who then went on to win the 2019 world 81kg title with the then Iranian taking bronze without fighting him.
Israel's head coach Moshe Fonti delivered a similar version to The Times of Israel: "Iranian intelligence agents went to his home in Iran and to the judo hall to warn him," declared the newspaper.
The International Judo Federation banned Iran indefinitely in October 2019 even though they denied the claims.
"The international federation shouldn't have taken such a measure against judo in Iran merely based on a false claim by an athlete," said federation chief Arash Miresmaeili at the time.
Iran does not recognise Israel and its athletes usually refrain from facing Israeli opponents, whether by giving up the match or simply not participating, and are later praised by top officials.
One of the most famous cases was Miresmaeili himself, a two-time judo world champion who showed up overweight for his bout against an Israeli at the 2004 Olympics in Athens and was disqualified.
He was praised by Iran's then-president Mohammad Khatami and the ultraconservative media and eventually made his way to become the judo federation's chief.
The footballer Masoud Shojaei, then captain of the national team, was first banned for life, before being reinstated before the 2018 World Cup, for playing for his Greek club against Maccabi Tel-Aviv in August 2017.
Denounced by the Iranians, Mollaei took refuge in Mongolia and has competed in their colours since.
Last year the IOC agreed to let him compete at the Olympics for his new country, although in principle it should have taken him three years to qualify.
In February, Mollaei was given a hero's welcome when he competed at the Tel Aviv Grand Slam in Israel.
Muki posted a photo on social networks of himself with Mollaei dating from February 2020, captioned "Welcome brother" and accompanied by the flags of Israel, Iran and Mongolia.
Mollaei went on to win the silver medal in the under-81kg category.