Sanader said the sentences were a "defeat of the whole idea of the Hague tribunal".
"We shall lodge a strong protest with the UN Security Council," Sanader said.
He also gave orders to send a protest to the chairman of UN war crimes tribunal in The Hague.
'Killed once again'
Prosecutors said the victims were largely civilians and sought life sentences for the three officers for effectively allowing the killings to take place.
Vladimir Seks, the speaker of the Croatian parliament said "with this verdict, the Vukovar victims are as good as killed once again".
The ruling shocked the Croatian public, which sees Vukovar as a symbol of the country's suffering and its struggle for independence from Serb-dominated Yugoslavia.
Mile Mrksic, 60, a colonel in the Serb army at the time of the offence and the commander of the Serb forces in the region, received a 20-year sentence for withdrawing protection of Croatians and other non-Serbs, who were later killed by Serb paramilitary forces.
Veselin Sljivancanin, 54, the area's chief security officer, was sentenced to five years for failing to protect the Croatians, who were considered prisoners of war, from beatings and torture by the local Serb paramilitary forces and Territorial Defence units.
Miroslav Radic, 45, the third of the group known as the "Vukovar Three", was found to have had nothing to do with the cruelty meted out to the hospital evacuees and ultimately their murder.
Night of torture
Radic was ordered to be released immediately. Sljivancanin, who was arrested by Serb authorities in June 2003, will be credited for his time in detention and will be released within a year.
The hospital in the eastern Croatian town fell to the Serb army in November 1991 after a three-month siege that virtually levelled the town.
When an agreed hour approached, an armoured Serb vehicle blocked access across a bridge to the hospital while buses took another route to smuggle out the men seized inside the building.
More than 200 men were taken first to a Serb army barracks, then to a pig farm at Ovcara where they passed through lines of soldiers who "beat them with wooden sticks, rifle butts poles chains and even crutches", said a court statement.
Their guards formed "shifts of beaters" in an unrelenting night of torture.
On the night of November 20, Mrksic ordered the Serb army and military police to withdraw.
The paramilitary forces took the men in small groups to an area nearby and shot them.