By a three-to-two majority, the court said Samuel Sheinbein, 18, should not be returned to the United States to stand trial for the murder of Alfredo Tello, a former friend, because of a 1978 law that bars the extradition of Israeli citizens to face trials abroad.
The court said the law superseded a 1963 extradition treaty signed by Israel with America.
Mr Sheinbein, who had a record of behavioural problems, and a teenage acquaintance, Aaron Needle, were quickly tied to the murder by detectives after they found Tello's body in the garage of an empty house in Wheaton, a comfortable suburb of Washington.
The case made headlines because of the sheer grisliness of what was found. The body of Tello, 19, better known as Freddy and a worker in a local tropical fish shop, had been charred almost beyond recognition and dismembered.
Beside it, detectives found an acetylene gas bottle and a new circular power saw. The legs and arms of the teenager were never found. Aaron Needle, the other accused man, died after hanging himself with a bedsheet last April while awaiting trial in prison.
American fury at this week's decision stems from the tenuous nature of Mr Sheinbein's claim to Israeli citizenship. He was born and lived all his life in the US. His father, Sol Sheinbein, a patent lawyer, was born in British-ruled Palestine and lived in Israel for two years after it was created before leaving for America in 1950. He has Israeli citizenship and his son, therefore, can also claim it.
The court made its ruling in spite of direct appeals to Israel to grant the extradition from both the US Secretary of State, Madeleine Albright, and the Attorney General, Janet Reno. Ms Reno later voiced her disappointment.
The decision was defended by the Israeli Prime Minister, Benjamin Netanyahu. "In a state of law the interpreter of the law is the Supreme Court, whose decision we must honour. I am sure that the United States, which is also a state of law, understands this," he said.
Israel's Justice Minister, Tsahi Hanegbi, promised yesterday that Mr Sheinbein would be brought swiftly to trial in Israel.
He added, however, that prosecuting him outside the US would be difficult. "It has become clear that the existence of such trials outside the borders of the state where the crime was committed makes it nearly impossible to carry out justice," he said.
The Israeli government had been hoping for a different decision. With so many Jews living abroad with claims to Israeli citizenship, the government is concerned that the country could become a sanctuary for criminals seeking to evade justice in other states.
Prosecutors in Houston fear another man with Israeli citizenship charged this week with killing a clerk in a wig shop may have fled to Israel.
That worry was highlighted by one of the Israeli judges. Chief Justice Aharon Barak noted that hundreds of thousands of Israelis live abroad and that the Sheinbein decision risks turning "Israel into a sanctuary state" for criminals.
In the US House of Representatives Albert Wynn, member for the Maryland district where Tello was killed, said he was "appalled.
"The court undermines the spirit of co-operation embodied in the Israeli treaty with the United States. If the situation were reversed, we would be expected to co-operate and we expect no less from our allies," he said.Reuse content