The court, however, sentenced a sixth defendant, the captain of another ferry, to six months in prison for failing to take steps to save survivors.
Ismail had been accused of contributing to manslaughter by failing to inform the authorities as soon as he heard of a problem aboard the ferry.
However, he said that no one on the vessel contacted either him or his company when the fire broke out.
Egyptian authorities first heard of the disaster many hours after the fire broke out.
In 2006 a committee investigating the sinking widened the blame to include the state of Panama, under whose flag the boat was sailing.
A parliamentary report on the disaster blamed Ismail for serious violations of safety regulations.
It said the ferry had forged safety certificates, the life rafts and fire extinguishers were unfit for use and the ship did not have enough winches to lower rafts into the sea.
Egyptian authorities lifted a freeze on Ismail's assets in 2006 and removed him and his family from the list of people banned from travelling abroad after he paid about $57 million into a compensation fund for victims of the disaster.
Mohammed Ali Hassan, the lawyer representing the family of the victims, said that the court's verdict came as a shock to the families.
|The Al Salam 98 ferry caught fire and sank [YVAN PERCHOC/AFP]
"It seems that the court's judge completely ignored our prosecution committee report and the reasons announced with the verdict completely contradicted it," he said.
Hassan said the incident was the biggest accidental homicide case in the history of Egypt, "and despite all of this, the defence lawyers were acquitted," he said.
The defence lawyers will meet to discuss the verdict and to take appropriate action.
"I think the prosecution will appeal," Hassan said.
Al Jazeera's Amr el-Kahky in Hurghada, said: "Families gathered since early morning outside the courthouse, and after two and a half years, they gathered for the 22nd time and today they received a shocking verdict".
The families of the victims accused the government of masterminding the exoneration of the owner who operated the company "because he is an influential figure in the ruling National Democratic Party and is well connected with influential politicians in Egypt," he said.
Kahky said that families who gathered in front of the courthouse were those "who refused to be paid compensation from the Italian company that owned the ferry. Rather they hoped they would see someone responsible for the loss of many lives".