The man's lawyer, Marie Dyhrberg, said her client should be allowed to keep his record clean. She said a conviction would make it hard for him to work again as a comedian.
Judge Cunningham said the consequences of a conviction would outweigh the gravity of the offence.
She also granted the man permanent name suppression to protect the identity of his daughter.
"He's a talented New Zealander. He makes people laugh. Laughter is an incredible medicine and we all need lots of it," the judge said.
Ms McPhillips last night told the Weekend Herald a discharge without conviction meant he was "invisible" from the crime and could apply to be a teacher, for example, without a criminal record - "as if he didn't do this. There's nothing to stop him doing this to other children."
Ms McPhillips said the whole family had paid the price for the offending, not just the man. She told the Weekend Herald she hoped there was not a trend emerging of people escaping without convictions because of the impact it could have on their careers.
The court heard yesterday that the man went to bed with his partner after returning home drunk from a Christmas work party in December 2009. After he fell asleep, his daughter got into bed with them.
According to the police summary of facts the man laid his daughter on her back, pulled down her pyjama pants and nappy and kissed her.
The man's partner woke up and asked him what he was doing. He replied: "I thought it was you."
He later told police that he remembered nothing of the incident.
Judge Cunningham said a report from a forensic psychiatrist found that the man had previous episodes of "unusual behaviour" after going to bed drunk. The report said it was possible he was "not fully awake" when he performed the indecent act.
The case was "extraordinary", the judge said, and the consequences of a conviction would outweigh the gravity of the offence.
The man's partner, who also has permanent name suppression, wept as she told the court that she and her daughter had been having counselling.
She said the pair ended their five-year relationship after the incident happened.
Associate Professor Bill Hodge of the Auckland University law school said he was concerned a person's position in society could get them "special treatment in the courts".
"If he'd been an auto mechanic he would have been down the drain before you could blink."