Serebrennikov, who heads Moscow's Gogol Centre theatre, was accused of embezzling 200 million rubles ($3.05 million at the current exchange rate) of government funds and was first detained in August 2017 together with several co-defendants.
But on Wednesday the Meshchansky District Court in Moscow said it had "returned the criminal case to the prosecutors" and lifted the travel ban imposed on Serebrennikov and his three former colleagues who were also on trial.
Judge Irina Akkuratova ordered the prosecutors to take the case back because of "contradictions that prevent it being heard in court and reaching a verdict," RIA Novosti news agency reported.
Serebrennikov had argued that the case has been fabricated and a financial evaluation of his Platforma theatrical project at the heart of the case concluded that he in fact spent more money than he received from the government.
The lawyer for Serebrennikov's co-defendant Sofia Apfelbaum, Irina Poverinova, said Wednesday's decision was a "compromise", while the legal team wanted the defendants to be acquitted of the charges.
"I wouldn't say we're overjoyed, but of course it's a positive fact," she told independent Dozhd television. "We have no idea what the investigators will do."
The case against Serebrennikov, who had disagreements with Russia's cultural authorities in the past over his modern adaptations of Russian classics, caused a scandal in the arts world.
The director was briefly in jail before being transferred to house arrest and finally released but told to stay in Moscow. Throughout the case he continued working and staged an opera in Germany by passing instructions to actors on a USB stick.
On Tuesday Russian GQ magazine named Serebrennikov "Man of the Year." He said the award should instead go to people who "fight for justice" and work to free those unfairly arrested in Russia.