Lagat, 2000 Olympic bronze and 2001 world championship silver medallist, pulled out of this year's IAAF world championships in Paris on August 23 complaining of illness after being told he had tested positive for EPO (erythropoietin).
Athletics Kenya announced in early September that Lagat was temporarily suspended after testing positive for the banned blood-enhancing substance while competing in Germany on August 8. But with the B test negative, he is free to compete again.
"The analysis of the B sample was conducted by the IOC-accredited laboratory in Cologne, Germany on 29 September and did not corroborate the original result," the International Association of Athletics Federations website said on Wednesday.
"Consequently the athlete is able to compete."
Lagat said in a statement: "I am extremely happy that I have been proven innocent of drug taking and I want to stress again that I have never used any kind of performance-enhancing drug.
"I hope this outcome will also remove any suggestion that I have ever taken drugs," said the 28-year-old, who won the 1,500 metres at the IAAF World Cup in Madrid in September 2002.
In the statement issued by his manager James Templeton on Wednesday, Lagat added: "I hope this outcome will also remove any suggestion that I have ever taken drugs.
"I have always, and will continue to do so, unreservedly condemn drug use in sport.
"These past weeks have been extremely difficult as the false positive A sample meant that not only did I lose the opportunity to follow my profession and compete for a medal at the world championships in August but I also found my name connected around the world with drug abuse and cheating, and especially in the news in my home country Kenya, and that is something I found abhorrent.
"My experience suggests to me that there are serious flaws with the way the testing is currently being undertaken.
"I remain a strong supporter of a comprehensive drug testing policy in athletics," he said.
"However, such a policy needs to be based on fairness, transparency and accuracy and I do not believe that to be the case in the testing for this type of drug."
Lagat said he would now return to his home in Tucson, Arizona to recover from "this ordeal" and then resume training to prepare for next year's Olympic Games in Athens.