Hasim Kilic, chief of the 11-member court, said instead that the AKP will lose some state financial assistance, according to the Associated Press. Six judges voted to close the ruling party, one fewer than the number needed.
The verdict ended months of political uncertainty, which hit financial markets in Turkey over concerns that the removal of a democratically elected government would hamper political and economic reforms to help it join the European Union.
A spokeswoman for the EU called the decision "positive."
"Of course we have to read it now in more detail, but it is positive. Turkey is living a tense situation and we very much hope that the decision by the court will contribute to restore political stability," said Cristina Gallach, spokeswoman for EU foreign policy chief Javier Solana, reported Reuters.
The indictment said the AKP had become a "source of anti-secular actions." If the court had shut down the party, it would have decided later whether to ban Prime Minister Recep Tayyip Erdogan, President Abdullah Gul and 69 other AKP members from politics for five years.
AKP was accused of making changes considered non-secular, such as banning alcoholic beverages in a portion of Ankara with restaurants and bars -- a ban that was later lifted. Also, it was accused of putting anti-secular individuals in government positions.
When the AKP proposed and passed a bill last year lifting a ban on head scarves in universities, the move appeared to be the last straw and led to this year's indictment.
The AKP said the indictment was purely political and that its efforts to have Turkey join the EU and other pro-business reforms countered anti-secular claims.
The Justice and Development Party, known as the AKP, was established in 2001 by moderate Islamists. It won 47 percent of the popular vote last year, which gave the party 341 of 550 available parliamentary seats. The Parliament elected Gul as the first president with a background in political Islam, which marked an historic shift in the majority Muslim country with a secular tradition.
Previous iterations of the party were banned in the past.