However, it upheld most counts against him in connection to the 43-month siege of the Bosnian capital during the 1992-5 war that killed an estimated 10,000 people.
"Milosevic did more than merely tolerate the crimes as a commander," Fausto Pocar, the presiding judge at the court in the Hague, said.
"In maintaining and intensifying the campaign directed at the civilian population in Sarajevo ... he provided additional encouragement to his subordinates to commit the crimes against the civilians."
The ruling came in response to an appeal by Milosevic, who is no relative of former Serbian president Slobodan Milosevic, over his conviction and life imprisonment.
'Central role'
Milosevic, now 67, commanded troops laying siege to Sarajevo from August 1994 to the end of the war in November 1995.
The troops shelled the city and directed sniper fire against civilians as they queued for bread, went to markets or walked with their children.
Milosevic surrendered to the ICTY in December 2004, and was convicted of war crimes and crimes against humanity three years later.
During his appeal, which was heard in July this year, judges found no proof that Milosevic had planned and ordered the sniping of civilians.
But they said he was responsible as a commander for failing to prevent and punish such crimes committed by his subordinates.
The judges also said there was no evidence that Milosevic had ordered the shelling of three civilian sites, but they said it did not "diminish his activity and central role in the commission of such crimes".
Milosevic will serve his sentence, which includes time spent at the detention centre in The Hague since his surrender in late 2004, in a yet to be determined country.