The 31-year-old, captain of European Champions Chelsea, who earns a reported £150,000 pounds a week, was in Westminster Magistrates' Court to hear chief magistrate Howard Riddle read his verdict after a five-day trial.
An exchange of foul language between the players during a Premier League game last October triggered the resignation in February of England's Italian manager Fabio Capello after the Football Association (FA) decided to strip Terry of the captain's armband for Euro 2012.
Terry denied committing a racially aggravated public order offence when he had an expletive-littered exchange with Ferdinand on the field of play when Chelsea visited Queens Park Rangers' Loftus Road ground.
In evidence, he admitted using the highly offensive words, but maintained he was sarcastically repeating what Ferdinand mistakenly thought he had said.
Explaining his verdict, Mr Riddle said the prosecution presented a strong case and said there was no doubt about the offensive words Terry used towards Ferdinand.
But, in summing up, he said: "Even with all the help the court has received from television footage, expert lip readers, witnesses and indeed counsel, it is impossible to be sure exactly what were the words spoken by Mr Terry at the relevant time.
"It is impossible to be sure exactly what was said to him at the relevant time by Mr Ferdinand. It is not only that all of this happened in a matter of seconds.
"They are professional footballers in the final minutes of a game where the result mattered to them both. They would naturally concentrate on the game more than on exactly what had been said to them or by them.
"There was the noise of the crowd. There is the fact that towards the end of a game players are not only physically tired, they are also mentally tired. I don't need evidence to tell me that.
"It is a crucial fact that nobody has given evidence that they heard what Mr Terry said or more importantly how he said it.
"He has given effectively the same account throughout. Insofar as there are discrepancies in his account, they are understandable and natural."
"In those circumstances, there being a doubt, the only verdict the court can record is one of not guilty."
During cross-examination, Ferdinand agreed he had sworn at players in the past and been on the receiving end himself.
He said he was angry at Terry seeking a penalty call and there had been some barging on the pitch.
He had also alluded to an alleged affair between the Chelsea player and the ex-girlfriend of former England team mate Wayne Bridge.
Terry had been stripped of the England captaincy before the 2010 World Cup following those allegations.
Alison Saunders, the Chief Crown Prosecutor for London said in a statement: "The very serious allegation at the heart of this case was one of racial abuse.
"It was our view that this was not 'banter' on the football pitch and that the allegation should be judged by a court.
"The Chief Magistrate agreed that Mr Terry had a case to answer, but having heard all of the evidence he acquitted Mr Terry of a racially aggravated offence. That is justice being done and we respect the Chief Magistrate's decision."
Terry left the court by taxi without speaking as soon as the case concluded, but Bruce Buck, the chairman of Chelsea, made a brief statement to the waiting media.
"Chelsea Football Club notes and of course we respect the decision of the magistrate today. We are pleased that John can now put his mind to football and go back to training and do what he has done for many years," he said.
Outside the court, a large crowd had gathered to hear the verdict, while passing cars beeped their horns in support.
Three supporters held a large banner emblazoned with the words "JT, Captain, Leader, Legend" in the blue and white colours of Chelsea.
After the verdict was announced, one man in Chelsea strip fell to his knees and shouted "Thank you God" before prostrating himself face down on the pavement.
Max Dellal, a 21-year-old student from London who had dressed his dog in a John Terry shirt, said the verdict was a victory for all Chelsea fans.
"John Terry's got a great career and thankfully it hasn't been tarnished by this baseless allegation. Now he can focus on reclaiming the Champions League and perhaps the Premiership," he said.
Allegations of racial abuse cast a shadow over the Premier League last season, with Liverpool's Luis Suarez banned for eight matches for abusing Manchester United's Patrice Evra during a match last October. The League is very ethnically diverse, with highly-paid players from all corners of the world.
The Suarez case was dealt with by the English FA rather than in court.
The maximum fine if Terry had been found guilty would have been 2,500 pounds. The damage to his reputation would have been far worse.
He would have been likely to face a ban from England, for whom he has played 77 times in the last nine years, and would have faced another inquiry by the FA which almost certainly would have resulted in a long ban next season.
