Lithuania violated an article on free elections in the European Convention on Human Rights, the ruling said.
Mr Paksas was impeached and removed from office as president after the Baltic state's constitutional court found that he had abused his position.
He is now a Euro MP in Strasbourg.
The judgement by the Strasbourg court on Thursday is binding, meaning that Lithuania, an EU member state, will have to act on it to prevent any similar violation in future.
But the judges did not award Mr Paksas compensation, saying their ruling was in itself "sufficient just satisfaction".
Lithuania was found to have violated Article Three of Protocol One (Right to free elections) in the European Convention on Human Rights.
In 2004 Mr Paksas became the first European head of state in modern times to be impeached and removed from office.
The former Soviet republic's constitutional court found that he had illegally arranged Lithuanian citizenship for a Russian-born businessman, Yuri Borisov.
But Mr Paksas, an aerobatic pilot in Soviet times, was cleared of the charge of having leaked state secrets to Russia.
After the constitutional court had backed Mr Paksas's disqualification, the Lithuanian parliament adopted a new electoral rule barring anyone from becoming an MP if they had previously been dismissed in impeachment proceedings.
Mr Paksas complained that the rule had been passed deliberately to bar him from office. He also said the constitutional court had lacked impartiality and had exceeded its powers.
The Strasbourg judges accepted that a breach of the constitution was "a particularly serious matter", but they argued that Mr Paksas's permanent and irreversible disqualification from running for election was disproportionate.
In 2009 Mr Paksas was elected to the European Parliament. He sits with the Europe of Freedom and Democracy group, which seeks to defend national sovereignty and prevent the further concentration of power in Brussels.

Mr Gustafsson, 42, is being flown back to Sweden from Africa, Sweden's Foreign Minister Margot Wallström said in a statement on Monday.
He was seized by al-Qaeda in the Islamic Maghreb (AQIM) along with two other men, one of whom was freed in a dawn raid in 2015.
Ms Wallström said Mr Gustafsson was "in good spirits", local media report.
"It is with great pleasure that I can announce that Johan Gustafsson has been released," Ms Wallström added.
She said that the Swede's release was thanks to "extensive efforts" and co-operation between the Swedish foreign ministry, police and "foreign authorities".
Ms Wallström said she had spoken with Mr Gustafsson, who she described as being "happy" and "overwhelmed" by Monday's events.
"I cannot say more at the current time," she added.
Sweden's former Foreign Minister Carl Bildt said that Mr Gustafsson's kidnapping weighed heavily on his mind during his time in the role, which ended in 2014.
He tweeted on Monday: "Extremely gratifying that Johan Gustafsson is free. No single case concerned me more as foreign minister."
Mr Gustafsson was kidnapped along with South African Stephen McGown and Dutchman Sjaak Rijke.
Mr Rijke was freed by French special forces in April 2015 after he was discovered by chance in a dawn raid in northern Mali.
AQIM took a number of Western hostages before the French military deployed its forces in January 2013.
In a separate incident in December 2014, French hostage Serge Lazarevic was freed after a prisoner swap.
The European Court of Human Rights has ruled that Lithuania was wrong to bar former President Rolandas Paksas from running for parliament after he had been ousted from power in 2004.
[NEXT_CONCEPT]
Hostage Johan Gustafsson, held by al-Qaeda in Mali since 2011, has been freed, the Swedish government says.