Mr Strauss-Kahn, 62, was accused in May of attacking the African immigrant as she entered his hotel room to clean it.
The ruling means he is a free man, though he still faces a civil suit Ms Diallo filed this month.
"Our inability to believe the complainant beyond a reasonable doubt means, in good faith, that we could not ask a jury to do that," Assistant District Attorney Joan Illuzzi-Orbon told Judge Michael Obus.
The dismissal of criminal charges at the New York State Supreme Court will take effect once the judge rules on an appeal against the move.
Mr Strauss-Kahn, considered a French presidential contender before the case, arrived for the hearing in lower Manhattan on Tuesday in a six-car motorcade with his wife Anne Sinclair.
Outside, about two dozen placard-waving protesters denounced the result, their cries audible from the packed courtroom on the 13th floor.
Ms Diallo claimed Mr Strauss-Kahn had confronted her in his luxury hotel suite in the city on 14 May and forced her to perform oral sex.
Prosecutors said DNA evidence had found that a "hurried" sexual encounter did occur between the two, but it did not establish Ms Diallo's claim that it was non-consensual.
In a statement released by his legal team on Tuesday, Mr Strauss-Kahn said: "These past two-and-a-half months have been a nightmare for me and my family.
"I want to thank all the friends in France and in the United States who have believed in my innocence, and to the thousands of people who sent us their support personally and in writing.
"I am most deeply grateful to my wife and family who have gone through this ordeal with me."
He added: "We will have nothing further to say about this matter and we look forward to returning to our home and resuming something of a more normal life."
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