An Iranian affiliated broadcaster said MP Nadhim Zahawi bought crude oil from the militant group and sold it to markets in Israel and Europe.
But High Court judges said the Iraqi-born Stratford-on-Avon candidate was a victim of "fake news".
He was awarded Â£200,000 in damages and legal costs of Â£138,483 against Press TV and UK-registered Press TV Ltd.
Mr Zahawi sued the English language news and documentary network - which is affiliated to Islamic Republic of Iran Broadcasting (IRIB), owned by the Iranian state - over a July 2015 website article which then went viral.
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It alleged Mr Zahawi funded and profited from trade with a terrorist group by purchasing the oil at a low price and selling it on.
But Mr Zahawi, chief strategy officer of Gulf Keystone Petroleum, said: "The ludicrous allegation that I, while a Member of Parliament, had firstly betrayed all of my deepest held moral principles, and secondly had somehow managed to avoid international security services, and the law, to personally trade oil with Daesh, was of course completely untrue."
He said the allegations spread "like wildfire" on social media and he had to defend himself from a "profoundly embarrassing and deeply upsetting experience".
He added that it was "of particular note" the article was published the same day he criticised Iran in Parliament.
Awarding the damages at London's High Court on Thursday, Master Victoria McCloud said Mr Zahawi had been "wrongly associated by way of `fake news' on the internet, with the consequence being very significant harm to his reputation."
Neither Press TV nor Press TV Ltd defended the case and judgment was entered in default

Josh Hanson, of Kingsbury, north-west London, was stabbed in the neck at the RE bar in Eastcote, Hillingdon.
He died at the scene shortly after 01:10 BST on Sunday.
Scotland Yard said about 40 people were in the bar at the time of the attack and urged anyone there after midnight to contact them with information.
No arrests have yet been made.
Det Ch Insp Noel McHugh said: "It is believed there would have been around 40 people present at the time of the incident, many of whom left the venue as paramedics worked to save Josh's life. It is imperative these people contact us to let us know what they saw.
"We are also keen to hear from anyone who was in Field End Road area at around 01:00 Sunday who may have seen or heard anything that they now think might be because of the incident at the RE bar."
A Conservative politician has won libel damages after it was reported he helped fund so-called Islamic State (IS).
[NEXT_CONCEPT]
A murder investigation has begun over a man who was fatally stabbed in front of dozens of customers at an over-21s bar in north-west London.