The decision increases Western pressure on Ukrainian President Viktor Yanukovych to end what it considers politically tainted prosecutions of opposition leaders and release them from jail.
Yuri Lutsenko, a former interior minister in Tymoshenko's government, was arrested in December 2010 on charges of embezzlement and abuse of office for allegedly giving illegal bonuses and perks to his driver. Lutsenko was sentenced to four years in prison in February.
The West has condemned the prosecution of Tymoshenko, Lutsenko and other top opposition figures as an attempt to sideline Yanukovych's political opponents ahead of October's parliamentary election. Top EU officials boycotted European Championship soccer matches hosted by Ukraine over Tymoshenko's jailing.
The European Court ruled that Lutsenko's arrest was "arbitrary" and said Ukraine must pay him (EURO)15,000 ($19,000) in damages.
Tuesday's decision is not final and can be referred to the court's Grand Chamber for appeal within three months.
There was no immediate comment from Kiev.
The Lutsenko verdict followed Tymoshenko's seven-year sentence for abuse of office while negotiating a natural gas contract with Russia in 2009.
In another case, Tymoshenko has been charged with evading millions of dollars in taxes while heading an energy company in the mid-1990s. If convicted, she faces up to 12 years in jail.
Tymoshenko denies all the accusations, saying Yanukovych is seeking to bar her from politics. He defeated her in the last presidential election in 2010, but she was one of the forces behind Ukraine's Orange democracy revolution that threw out his 2004 fraud-tainted presidential win.