Deputy police commissioner Abba Kyari was suspended after he was implicated in the case of Nigerian social media influencer Ramon Abbas, known as Hushpuppi, who pleaded guilty to money laundering and other crimes in the United States.
Kyari's indictment in the US prompted Nigeria's attorney-general Abubakar Malami to file an extradition request at the federal high court in Abuja.
Judge Inyang Ekwo dismissed the application on Monday, calling it "strange, incompetent and bereft of merit".
The judge said that as the country's chief law officer, Malami "ought to be aware that the Extradition Act forbids the surrendering of a defendant that is already facing trial before a competent court in the country".
Kyari is standing trial in Nigeria for an alleged link with drug barons.
The FBI said last year that Hushpuppi's crimes cost his victims almost $24 million in total.
According to the FBI, citing court documents, Hushpuppi confessed to paying Kyari a bribe for the arrest of a former associate.
Kyari has denied the charges.