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.
Corder reported from The Hague. Jovana Gec in Belgrade, Serbia, Raf Casert in Brussels and Aida Cerkaz in Sarajevo, Bosnia, also contributed.