Dozens of local journalists crowded the courtroom to support reporter Raimundos Oki and his former editor Lourenco Vicente Martins as the court ruled on a suit launched by Prime Minister Rui Aria de Araujo over an article in the Timor Post.
"You are free, you can return to your normal activities and please be careful in reporting news," judge Ivan Goncalves told the district court in the nation's capital.
After the verdict, Oki said he was relieved to be cleared and said the case would be seen as a bellwether for press freedom in Asia's youngest nation.
"I am happy to hear the court's ruling that cleared me, I hope this can serve as a lesson for me and other journalists to not be afraid but still careful in writing a sensitive article," he said.
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Prosecutors had sought a one year jail term for Oki and a two-year suspended sentence for Martins for publishing the November 2015 article, which mentioned de Araujo's role in a computer tender during his previous role as advisor to the minister for finance.
De Araujo objected to details in the piece and the Timor Post ran a front page clarification a few days later accompanied by an apology.
But De Araujo, who became Prime Minister in 2015, opted to sue Oki and Martins for defamation, claiming the article hurt his reputation.
The case drew criticism from rights groups, including the International Federation of Journalists, which last month said it was a "brutal attack on press freedom and an attempt to silence critical voices".
In March this year tiny East Timor held its first presidential elections since the departure of United Nations peacekeepers in 2012, in a sign of growing stability 15 years after the country gained independence following Indonesia's brutal occupation.
The vote sets the stage for more important parliamentary elections later in the year that will decide the next government and prime minister.
