Erdogan had sought a court order to stop the Axel Springer media group's chief Mathias Döpfner from repeating support for a TV satirist who insulted the Turkish leader in a now infamous 'smear poem.'
After failing to get an injunction from a lower court last month, Erdogan also lost an appeal before the higher regional court in the western German city of Cologne.
The judges said they considered Döpfner's letter of support "a permissible expression of opinion as protected under Article 5" of Germany's constitution, the court said in a statement.
Erdogan could still seek recourse before Germany's top tribunal, the Federal Constitutional Court.
The legal action came after Döpfner published in April an open letter in one of the Springer group's newspapers, in which he backed Jan Böhmermann - the satirist who in a poem accused Erdogan of bestiality and watching child pornography.
Böhmermann's recital of his so-called "Defamatory Poem" on national television in late March sparked a diplomatic firestorm and a row over freedom of expression.
During the broadcast Boehmermann gleefully admitted his poem flouted Germany's legal limits to free speech and was intended as a provocation.
In his letter, Döpfner took the comedian's side, declaring: "For me, your poem worked. I laughed out loud."
In a controversial move, Chancellor Angela Merkel authorised criminal proceedings against the comedian after Turkey requested he be prosecuted for defamation.
The higher regional court stressed Tuesday that its ruling in favour of Döpfner had no bearing on the other case still pending.
Erdogan has come in for fierce Western criticism of late over his increasingly authoritarian rule, just as the European Union has turned to Turkey to help stem the influx of asylum seekers from Middle East war zones.
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