"On behalf of all people, the court decides to acquit Abdelati al-Obeidi and Mohamed Belgassem al-Zwai of all charges against them," the judge said to shouts of "Long live justice!" from the defendants' families.
A bomb struck Pan Am flight 103 over Lockerbie killing 270 people in the air and on the ground.
Gaddafi's regime eventually paid 2.7 billion dollars in compensation in 2003 as part of a raft of ultimately abortive measures aimed at a rapprochement with the West.
"We are satisfied that the verdict proves that Libyan justice is transparent and equal," said Sami, a nephew of Obeidi, as he left the courtroom.
The two men were accused of mismanaging public funds in compensating families of victims of the Lockerbie bombing.
The prosecution had charged that Obeidi and Zwai were responsible for negotiating settlements with the Lockerbie families and had paid out double the amount originally planned.