A court in Nuremberg ruled there were "irremediable procedural problems" in the case against Richard Williamson, who was fined €6,500 ($8,600) in July for denying key facts about the Nazi genocide.
"The prosecutor now has the possibility of pressing charges on the basis of the same facts of the case," the court said in a statement.
A spokesman for prosecutors told news agency AFP that they indeed intended to file new charges "as quickly as possible," adding this could happen in around five weeks.
The renegade bishop, 71, told Swedish television in 2008 that "200,000 to 300,000 Jews perished in Nazi concentration camps" and disputed the existence of the gas chambers.
The interview was given in a city in Germany, where it is illegal to deny that the Nazis murdered six million Jews during World War II.
The court on Wednesday emphasized that its decision did not mean Williamson's actions were not illegal, but that procedural flaws had compelled it to annul the case.
Williamson, a member of the breakaway ultra-conservative Catholic fraternity, the Saint Pius X Society, also hit the headlines in 2009 when Pope Benedict XVI reversed his excommunication in a bid to bridge a rift with the organization.
Benedict later said he would not have made such a move if he had known about Williamson's views on the Holocaust.