Scientists followed 3,200 over 75s, who had no signs of dementia when they enrolled on the study, for three years. Of those, 217 went on to develop dementia.
They found those who drank between two and three units a day (20 to 30ml) were 29 per cent less likely to have started developing dementia by the end of the three-year period than those who were teetotal.
Two to three units is equivalent to a medium-sized (175ml) glass of wine (2.3 units) or a pint of beer (2.8 units).
The results for Alzheimer's, which accounts for two-thirds of dementia cases, were even more striking: such drinkers were 42 per cent less likely to have developed the disease.
The academics, led by Siegfried Wayerer of the Central Institute of Mental Health in Mannheim in Germany, concluded that "light-to-moderate" alcohol consumption could have a "protective effect" against dementia.
They wrote in the journal Age and Ageing: "We found that alcohol consumption ... is significantly associated with lower incidence of overall dementia and Alzheimer dementia."
They believe alcoholic drinks could work to stave off dementia in a number of ways.
The alcohol itself could work by lowering cholesterol levels, stopping blood from clotting too much and improving insulin sensitivity to blood sugar levels.
The non-alcoholic elements "may have antioxidant, anti-inflammatory and vaso-relaxant [blood vessel relaxant] properties", they wrote.
"It is still an open question whether different alcoholic beverages, such as beer, wine and spirits, have a similar effect," they noted.
"Some studies have shown a positive effect of wine only, which may be due either to the level of ethanol [alcohol], the complex mixture that comprises wine or to healthier life-style ascribed to wine drinkers."
Interestingly, there was no such protective effect for vascular dementia and cognitive decline, two other common types of dementia.
This could be because they cause dementia - just an umbrella term for a range of mental symptoms - in very different ways to Alzheimer's.
The study supports previous research which found that alcohol appears to cut the chance of dementia and Alzheimer's in the younger retired.
However, the authors noted that prolonged heavy drinking is thought to be responsible for about one in 10 cases of dementia.
In Britain about 750,000 people are thought to suffer from dementia, although less than half has received a diagnosis. The number is expected to top one million by 2021.
Dr Anne Corbett, research manager at the Alzheimer's Society, said: "The idea that a drop of your favourite tipple could reduce risk of dementia will come as welcome news to many. This latest study adds real punch to the growing argument that this could be the case.
"However, it is still unclear whether all types of alcohol bring the same benefits and it is likely other lifestyle factors have a part to play."
She added: "What is important is that this is not seen as a green light to hit the bottle. As well as many other health dangers, heavy drinking has been linked to an increased risk of dementia. The best way to reduce your risk of dementia is to eat a healthy diet and exercise regularly."
The German academics said they could not prove that drinking in moderation had a causal effect on protecting against dementia, because to do so would require a randomised controlled trial where the volunteers did not know if they were receiving an alcoholic drink or a non-alcoholic one.
Such a trial would be "neither ethical nor practically feasible", they conceded.