The case. which saw President Emmanuel Macron go against the so-called Mitterand doctrine, has poisoned relations between Rome and Paris for 40 years.
A French court has blocked extradition requests for ten former members of the far-left Italian Red Brigades.
The suspects — all aged in their 60s and 70s — are accused of committing terror offences in Italy during the so-called Anni di piombo or Years of Lead in the 1970s and 1980s.
The eight men and two women had fled the country after the group became dormant in the 1980s and took refuge in neighbouring France.
Italy has tried to extradite the suspected left-wing militants for several years and the case has poisoned relations between the two European Union countries.
On Wednesday, the Paris Court of Appeal ruled against Italy's request, based on the suspects' right to a fair trial and family life under the European Convention on Human Rights.
The verdict was welcomed by supporters of the former activists outside the court.
"It's the triumph of rights, humanity and justice against the reason of State," said lawyer Irene Terrel, who represented seven of the former Red Brigades.
Macron goes against Mitterand doctrine
Last year, French President Emmanuel had surprisingly supported Italy's extradition requests after months of negotiations with Rome.
Under a 1980s policy known as the Mitterrand doctrine, France had previously refused to extradite Italian far-left activists if they pledged to renounce violence.
But upon Macron's u-turn, the ten suspects were all arrested last year on suspicion of particularly serious "crimes of blood".
"I believe that the Italians should be able to face up to their history and examine their past," said Antoine Comte, a lawyer for Red Brigade defendant Sergio Tornaghi.
"Several generations of young people were involved in armed movements [...] it was a terrible period", he added, calling for Italy to introduce an amnesty law.
Prosecutors have indicated that they will appeal the court ruling.
During the Years of Lead, more than 360 people were killed and thousands injured in repeated attacks by the extreme right and the extreme left.
An estimated 10,000 were arrested for their alleged roles and around 5,000 people have been convicted.
The Red Brigades were among the most notorious militant groups and were blamed for hundreds of murders, including the kidnapping and killing of former Italian Premier Aldo Moro in 1978.
Many in Italy believe that the ten suspects should face the domestic judiciary.