Ann Kramer was just two years old in March 1961 when her mother blamed her for killing her six-month-old sister Margaret Loomes by placing a plastic bag over her head.
A police investigation at the time concluded the baby's death was a tragic accident.
Overturning the original 1961 ruling, coroner John Olle today ruled that it was Ms Kramer's mother Phyllis Loomes who was responsible for the baby's death at the family home in Clayton, Victoria.
Mr Olle said it was likely Mrs Loomes blamed her daughter because she was suffering from postnatal depression.
Mrs Loomes confessed to the killing on a number of occasions in the early 1970s.
Ms Kramer told the hearing that her mother had told her she was unwell when she killed Margaret because her husband Colin Loomes did not want his second child to be another daughter.
'For many years growing up as a child I just felt awful,' Ms Kramer told the hearing. 'I thought I must've been a horrid child to kill my sister.'
She added that despite her mother's confessions, people still thought her responsible for her sister's death: 'They still thought I was a murderer.'
Between 1960 and 1980 Mrs Loomes was regularly admitted to psychiatric hospitals attempted suicide several times.
She had another five children with her husband before they divorced in 1978. In 1980, Mrs Loomes fatally struck him on the head with a heavy object but was found unfit to stand trial for his murder.
She committed suicide in 1983.
Passing his ruling - which came about after Ms Kramer wrote to the coroner asking for the original ruling to be changed - Mr Olle said: 'For almost half a century, she has carried the indescribable burden of having caused the death of her baby sister.
'In fact, she bore no responsibility whatsoever for the death of Margaret.'
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