State law requires prosecutors to prove in a perjury case that any deception had a material effect on the result of the case.
Gradel said he did not know whether his office would attempt to refile the felony charge.
Matthews appeared relieved after Stitzel made her ruling. Before, he could have faced up to nine years in prison if convicted of both counts. The remaining misdemeanor charge carries a maximum punishment of two years in jail.
He declined to comment while leaving the Norristown courtroom with his wife.
"This was a good day for Jim," said Thomas C. Egan III, one of at least five lawyers the former commissioner brought to the hearing.
Montgomery County detectives arrested Matthews in December after an 18-month grand jury investigation into allegations he misused campaign contributions, awarded government contracts to friends, and conducted county business in secret.
In a 69-page report, the panel concluded that while many of Matthews' actions during his years at the helm of county government had been unethical, they did not rise to the level of crimes.
He was charged, however, with lying during his grand jury testimony about his past relationship with a company that was awarded county contracts and discussions he had with witnesses in the case against him.
Matthews has described the probe as a political "witch hunt" and accused Republican Commissioner and former District Attorney Bruce L. Castor Jr., an avowed enemy, of influencing investigators.
During Friday's court hearing, his defense team sought to paint as exaggerations specific statements that had been cited as lies by the grand jury.
Two dealt with his association with Jennifer McGuire, owner of Certified Abstract, a Fort Washington firm that handled titling for all land purchases in the county's open-space program.
Grand jurors alleged that Matthews tried to minimize his relationship with her and the ownership stakes both held in a separate title company.
The panel also accused Matthews of lying about conversations he had with McGuire after he found out she had been subpoenaed to testify in the case, despite a gag order.
County Detective Paul Bradbury testified Friday that Matthews' repeated attempts to reach McGuire before she testified left her scared and intimidated.
"We lost her as a witness," he said. "She had come unraveled. She was done."
The grand jury also accused Matthews of discussing other allegations with then-County Solicitor Barry Miller.
Matthews and Miller - along with former Commissioner Joseph M. Hoeffel III - were accused of violating the state's open-meetings laws by regularly deciding county business at breakfast meetings.
Miller later told grand jurors that after he was subpoenaed, he briefly mentioned to Matthews that the case was about what had come to be called "Breakfastgate."
Matthews' defense team argued Friday that their client never sought to hide his relationship with McGuire, and that he acknowledged their past business association when questioned.
And while he testified that he had not talked about the case with other witnesses, he did not consider the brief conversations he had with McGuire and Miller full-blown discussions, his attorneys said.
But prosecutors maintained that in total, these small deceptions suggested a larger portrait of an evasive politician who intentionally misled the investigation.
"This is a very simple case," said Special Prosecutor Antonetta Stancu. "It's a case about a man who went before the grand jury, swore an oath to tell the truth and nothing but the truth, and did not do that."
Though Friday's ruling significantly limits Matthews' legal exposure, the grand jury report that initiated the case has already led to changes in the county's government.
Commissioners fired Miller within days of the report's release. A new administration led by Democrat Josh Shapiro has implemented new policies for bidding on county contracts and requested a review of all government departments.
Matthews, the brother of MSNBC political pundit Chris Matthews, was first elected to the commissioners board in 1999.
He retired from the post last year after a failed 2006 run for lieutenant governor with Republican gubernatorial nominee Lynn Swann and a contentious last four years in office that put him at odds with many in his own party.
Stitzel, of Berks County, was appointed to handle preliminary matters in Matthews' case to avoid political conflicts with any of Montgomery County's judges. She did not set a date Friday for the former commissioner's next court hearing.
Contact Jeremy Roebuck at 267-564-5218 or email@example.com, or on Twitter @jeremyrroebuck.