Croatians viewed the decision to release Ante Gotovina and Mladen Markac as vindication that they were the victims in the Balkan wars in the 1990s, but neighboring Serbia denounced the ruling as a scandalous injustice toward tens of thousands of its compatriots who were expelled from Croatia after an offensive led by the two.
The deep division over the generals could set back efforts to reconcile the two wartime enemies - the most bitter rivals in the Balkans.
A red carpet was laid out as a Croatian government plane carrying Gotovina and Markac from the Hague, Netherlands, touched down in Zagreb, Croatia's capital, and the two were welcomed by Prime Minister Zoran Milanovic and other top officials.
"This is our joint victory," Gotovina told a cheering crowd singing patriotic songs at Zagreb's main Bana Jelacica square. "We have won, the war is over and let's turn to the future."
The generals later attended a packed Mass held in Zagreb's large gothic cathedral "to thank God" for their release.
The 3-2 majority decision in the U.N. court's five-judge appeals chamber is one of the most significant reversals in the court's 18-year history. It overturns a verdict that dealt a blow to Croatia's self-image as a victim of atrocities, rather than a perpetrator, during the war.
Yet the ruling produced fury in Serbia, where it was seen as further evidence of anti-Serb bias at the U.N. tribunal. Even liberal Serbs warned the ruling created a sense of injustice and could stir nationalist sentiments.
Serbia's nationalist President Tomislav Nikolic declared that the "scandalous" decision by the Hague court was clearly "political and not legal" and "will not contribute to stabilization of the situation in the region but will reopen all wounds."
Tens of thousands of people, including Croatian war veterans, celebrated in Zagreb's main square. Some sobbed with joy while others ignited flares, sipping beer and drinking wine from bottles.
"Finally, we can say to our children that we are not war criminals," said veteran Djuro Vec. "We fought for justice, and that our fight was righteous and just."
In The Hague, neither Gotovina nor Markac showed any emotion as Presiding Judge Theodor Meron told them they were free, but their supporters in the court's public gallery cheered and clapped.
Gotovina and Markac had been sentenced to 24 and 18 years respectively in 2011 for crimes, including the murder and the deportation of Serbs, during the 1995 Croatian offensive dubbed "Operation Storm." Judges ruled that both men were part of a criminal conspiracy led by former Croat President Franjo Tudjman to expel Serbs.
The fighting in Croatia was part of the wars that erupted across the Balkans with the breakup of Yugoslavia in the 1990s. The most deadly was in Bosnia, where Serbs battled Muslims and Croats in a four-year struggle that claimed some 100,000 lives.
Serbia claims that over 1,000 Serbs were killed and more than 200,000 driven from their homes during the Croatian operation. Tribunal prosecutors put the death toll lower, at 324, but told the court the victims included elderly and disabled villagers - many of whom had been shot in the head.
But the appeals judges said prosecutors failed to prove the existence of such a conspiracy, effectively clearing Croatia's entire wartime leadership of war crimes in the operation. It occurred at the end of Croatia's battle to secede from the crumbling Yugoslavia and involved grabbing back land along its border with Bosnia that had earlier been occupied by rebel Serbs.
Serbs who fled "Operation Storm" were furious.
"As far as I understand this ruling, it is perfectly normal and legal to kill Serbs since nobody is being held responsible for it," said Stana Pajic, who fled the offensive in 1995. "I'm terribly shaken by this unjust verdict."
She used to live in the western Croatian town of Knin but had to flee the 1995 offensive in a truck carrying her family's few belongings.
Croatia's liberal president, Ivo Josipovic, said Friday's ruling was "proof that the Croatian army did not take part in a criminal enterprise" and "a symbolic satisfaction for all victims of the war."
Vesna Skare Ozbolt, former legal adviser for the late President Tudjman, said the verdict "corrects all wrongs about our just war," and "proves that there was no ethnic cleansing in Croatia and that it was all lies."
Tudjman died in 1999 while under investigation by the tribunal.
Across the border, the acquittals enraged hardline opponents of the U.N. court.
Vladimir Vukcevic, Serbia's war crimes prosecutor, branded the ruling "scandalous," saying it endangered the general principle that war crimes must be punished.
"This was one of the biggest war crimes in the former Yugoslavia, murder, expulsion and endangering of several hundred thousand people, and no one was held responsible," Vukcevic told The Associated Press.
Serbian government officials said later Friday they would be scaling down cooperation with the tribunal to "only technical levels" because of the ruling. They did not elaborate. The tribunal announced late Friday that a conference scheduled for next Thursday in Belgrade to discuss the tribunal's legacy when it finally closes its doors had been postponed.
Gotovina's and Markac's convictions were one of the few at the tribunal to punish perpetrators of atrocities against Serb civilians. The majority of criminals convicted have been Serbs. The Bosnian Serb wartime leader and military chief, Radovan Karadzic, and Gen. Ratko Mladic are currently on trial for allegedly masterminding Serb atrocities.
Gotovina, 55, is especially popular among Croatian nationalists. The charismatic former soldier fought in the French Foreign Legion in the 1980s and spent four years on the run from justice before being captured in the Canary Islands in December 2005.
The earlier verdicts against the two generals had triggered anti-Western sentiment among nationalist Croatians even as the country itself looked forward to joining the European Union in 2013.
European Commission spokesman Peter Stano said the EU hoped that "Croatia will continue to look to the future in the spirit of tolerance and reconciliation which brought this country where it stands today, on the threshold of EU membership."
The original convictions were based on a finding that Croat forces deliberately used illegal artillery attacks on four towns to drive Serb civilians from their homes. But appeals judges overturned that key finding and said therefore no criminal conspiracy could be proven.
The majority said there was insufficient evidence to prove a campaign of illegal shelling, rejecting the trial judges' view that any shell which hit further than 200 meters (yards) from a legitimate military target was evidence of indiscriminate shelling. Judge Carmel Agius, in a written dissenting opinion Friday, called the appeals court's reasoning "confusing and extremely problematic."
There are no other Croat suspects on trial at the tribunal whose cases could be affected by the ruling.
Gotovina's American lawyer, Greg Kehoe, said the appeals judgment didn't undermine the tribunal's credibility, it proved its impartiality.
"Is it a vindication for the rule of law and justice? Yes it is," he said.