The study, led by Dr. Barbara Schmidt, the principal investigator of the research project researchers at McMaster University, examined more than 2000 premature babies who were either treated with caffeine or given a placebo.
The research involved infants who weighed between 500 and 1250 grams at birth, and who were at risk of apnea - interrupted or irregular breathing due to immaturity.
The analysis of the study found that babies receiving the caffeine were less likely to develop cerebral palsy and cognitive delay.
According to Schmidt, the results of the study showed that 46 percent of the infants receiving the placebo died or survived with a neurodevelopmental disability.
Among the babies receiving caffeine therapy, only 40 percent had an unfavourable outcome by the time they reached the end of their second year of life.
"It definitely gives hope to parents. Of all the drugs we use in the neonatal intensive care unit, caffeine is the first to have been shown conclusively to reduce long-term disability in very preterm babies," Schmidt said.
The study found that caffeine reduced the rates of cerebral palsy and cognitive delay but had no significant effect on the rates of death, bilateral blindness and severe hearing loss.
"This international study provides important follow-up to the earlier results reported by Dr. Schmidt and her colleagues and should have a major impact on the treatment and prevention of apnea in preterm infants," said Dr. Michael Kramer, Scientific Director of the CIHR Institute of Human Development, Child and Youth Health.
Schmidt said that half of the beneficial treatment effect at two years of age was explained by the fact that babies receiving caffeine therapy came off ventilators sooner.
"Ventilation is a double-edged sword. While it is life-saving, at the same time, it causes injury - scarring the immature lung which is very susceptible to damage," she said.
The study is issued in the New England Journal of Medicine (NEJM).