"The trial chamber finds you (Milutinovic) not guilty of counts one to five of the indictment," Iain Bonomy, the court's judge, said, and ordered him to be released from detention.
Bonomy said it was Slobodan Milosevic, the former Yugoslav president, who was the most powerful commander of Serb troops and military police, who carried out a campaign of murder, rape and deportations in Kosovo.
"In practice, it was Milosevic, sometimes termed the 'Supreme Commander' who exercised actual command authority over the (Serb army) during the Nato campaign,'' the judge said.
A previous ICTY case against Milosevic was aborted when he died in custody three years ago.
The other five defendants were found guilty of a joint-criminal enterprise seeking to alter the ethnic balance of Kosovo in Serbia's favour.
The co-accused - Nikola Sainovic, former Yugoslav deputy prime minister, Dragoljub Ojdanic, ex-defence minister, Nebojsa Pavkovic and Vladimir Lazarevic, former army commanders and Sreten Lukic, former public security service chief, had all pleaded not guilty to the charges.
|Around 800,000 ethnic Albanians were forced to flee Kosovo before Nato troops entered [GALLO/GETTY]
Sainovic, Pavkovic and Lukic received 22-year prison sentences after being found guilty on charges of deportation, forcible transfer, murder and persecution.
Ojdanic and Lazarevic were given 15 years in jail for the deportation and forcible transfer of civilians.
Serbia's Socialist Party, which was founded by Milosevic and currently forms part of the country's ruling coalition, called the prison sentences "unfair".
"In the softest possible terms, this is an unjust verdict," Djordje Milicevic, party spokesman, said.
"Those who defended their country and their people against aggression were convicted."
Muhamet Hamiti, who heads the Kosovo Embassy in London, had hoped the defendants would receive life sentences.
Speaking to Al Jazeera before the verdict was handed down he said: "This is the first major trial of the big fish from Serbia... who actually orchestrated the onslaught against the people of Kosovo.
"This is an important day for international justice and I hope the ICTY hands out life for these criminals," he said.
In 1998, the Kosovo liberation army, supported by the majority ethnic Albanian population, rose up against Serbian rule, leading to a violent Serbian crackdown led by Milosevic.
Thousands of Kosovars were killed and hundreds of thousands forced to flee. A Nato bombing campaign eventually stopped the violence.
In 2008 Kosovo declared independence, but this has not been officially backed by the UN.