The death of pro-Palestinian activist Rachel Corrie was a "regrettable accident" for which the state of Israel was not responsible, a judge has ruled, dismissing a civil lawsuit brought by the family.

The young American had "put herself in a dangerous situation" and her death was not caused by the negligence of the Israeli state or army, said Judge Oded Gershon at Haifa district court.

The 62-page ruling found no fault in the internal Israeli military investigation which cleared the driver of the bulldozer which crushed Corrie to death in March 2003. The judge said the driver could not have seen the activist from the cab of the bulldozer.

Corrie could have saved herself by moving out of the zone of danger "as any reasonable person would have done", he said. The area was a combat zone, and the US government had warned its citizens not to go there.

International activists were intent on obstructing the actions of the Israeli military and acting as human shields "to protect terrorists".

Corrie was killed on 16 March 2003, crushed under an Israeli military bulldozer while trying to obstruct the demolition of a Palestinian home in Rafah, on the Gaza-Egypt border.

The lawsuit, filed by Corrie's parents, Cindy and Craig, of Olympia, Washington state, accused the Israeli military of either unlawfully or intentionally killing Rachel or of gross negligence. The family had claimed a symbolic $1 (63p) in damages and legal expenses.

The judge said no damages were liable, but the family's court costs would be waived.

The family was "deeply saddened and deeply troubled" by the ruling, Cindy Corrie said at a press conference after the ruling. "I believe this was a bad day, not only for our family, but for human rights, humanity, the rule of law and also for the country of Israel."

The state had, she said, employed a "well-heeled system" to protect its soldiers and provide them with immunity. "As a family, we've had to push for answers, accountability and justice."

Rachel's sister, Sarah Corrie Simpson, said: "I believe without doubt that my sister was seen as the driver approached her." She hoped that the driver would one day "have the courage" to tell the truth.

The US government believed the military investigation was flawed, she added. Last week, the US ambassador to Israel, Dan Shapiro, told the Corrie family that Washington remained dissatisfied with the the inquiry. Hussein Abu Hussein, the family's lawyer, said: "This verdict is yet another example of where impunity has prevailed over accountability and fairness. Rachel Corrie was killed while non-violently protesting home demolitions and injustice in Gaza, and today, this court has given its stamp of approval to flawed and illegal practices that failed to protect civilian life.

"We knew from the beginning that we had an uphill battle to get truthful answers and justice, but we are convinced that this verdict distorts the strong evidence presented in court, and contradicts fundamental principles of international law with regard to protection of human rights defenders. In denying justice in Rachel Corrie's killing, this verdict speaks to the systemic failure to hold the Israeli military accountable for continuing violations of basic human rights."

The family would appeal against the ruling to Israel's supreme court, he added.

Also speaking after the ruling, the state's attorney said the Israeli soldiers at the scene of Corrie's death did "everything they could" to prevent harm being caused to any person.

In a statement, the Israeli justice ministry said: "The death of Rachel Corrie is without a doubt a tragic accident. As the verdict states, the driver of the bulldozer and his commander had a very limited field of vision, such that they had no possibility of seeing Ms Corrie and thus are exonerated of any blame for negligence …

"The security forces … were compelled to carry out 'levelling' work against explosive devices that posed a tangible danger to life and limb, and were not in any form posing a threat to Palestinian homes. The work was done while exercising maximum caution and prudence, and without the ability to foresee harming anyone."

According to Bill Van Esveld of Human Rights Watch, the verdict "sets a dangerous precedent in its claim that there was no liability for Corrie's death because the Israeli forces involved were conducting a 'combat operation' … The idea that there can be no fault for killing civilians in a combat operation flatly contradicts Israel's international legal obligations to spare civilians from harm during armed conflict, and to credibly investigate and punish violations by its forces."

The judge's statement that the military inquiry into Corrie's death had been without fault was "hard to reconcile with the facts", he said. "Military investigators repeatedly failed to take statements from witnesses, to follow up with the witness's lawyer, and to re-interview witnesses to clarify discrepancies."

Huwaida Arraf, a co-founder of the International Solidarity Movement, the activist organisation for which Corrie volunteered, said after the ruling: "The judge's ruling today is outrageous in so many ways, not least of which is the criticising of Rachel and the maligning of the International Solidarity Movement in an effort to place blame on all but those who killed Rachel and worked to cover it up. These are the same institutions that continue to injure and kill thousands of innocent Palestinians with no accountability. Not only does today's verdict mean that there is no justice for Rachel Corrie, but it also means that no human rights defender is safe from Israeli state violence."

At the time of Corrie's death at the height of the second intifada, or Palestinian uprising, house demolitions were common, part of an increasing cycle of violence from both sides. Palestinian suicide bombers were causing death and destruction with terrifying frequency; the Israeli military was using its mighty force and weaponry to crush the uprising.

The Israeli Defence Forces (IDF) said the houses it targeted with bulldozers and shells harboured militants or weapons, or were being used to conceal arms smuggling tunnels under the border. Human rights groups said the demolitions were collective punishment. Between 2000 and 2004, the Israeli military demolished around 1,700 homes in Rafah, leaving about 17,000 people homeless, according to the Israeli human rights organisation B'Tselem.

Corrie was one of a group of around eight international activists acting as human shields against the demolitions. According to witness statements made at the time and evidence given in court, she clambered atop a pile of earth in the path of an advancing Caterpillar bulldozer. Fellow activists said she was clearly within the line of sight of the bulldozer driver.

The day after Corrie's death, Israel's then prime minister, Ariel Sharon, promised US president George W Bush that Israel would conduct a "thorough, credible and transparent" investigation into the incident.

Within a month, the IDF had completed an internal inquiry, led by its chief of staff. It concluded that its forces were not to blame, that the driver of the bulldozer had not seen the activist, that no charges would be brought and the case was closed.

The Corries launched their civil lawsuit against the state of Israel as an "absolutely last resort". The case opened at Haifa district court in March 2010.

Among those giving evidence was the driver of the bulldozer, who testified anonymously from behind a screen for "security reasons". He repeatedly insisted that the first time he saw the activist was when she was already dying. He said: "I didn't see her before the incident. I saw people pulling the body out from under the earth."

The hearings ended in July last year.