Forensic evidence about a tiny speck of gun residue found in Barry George's coat pocket after his arrest helped secure his original conviction.
The prosecution said this proved that he had fired the fatal shot and he was convicted by a majority of 10 to one.
But last year, the Court of Appeal ruled new scientific doubts over the evidence meant the conviction had to be quashed and ordered a retrial.
The appeal hearing was told it was "just as likely" that the particle came from "some extraneous source as it was that it came from a gun fired".
The residue evidence was not permitted to be put before the retrial jury.
Mr George's sister Michelle Diskin, who has led the fight for his release, was instrumental in getting the Criminal Cases Review Commission to refer the case to the Court of Appeal.
"We are really delighted to finally have justice," she said.
Barry George's sister said she hoped police will launch a reinvestigation
"A huge thank you to the jury. They obviously worked very hard to ensure they correctly interpreted the circumstantial evidence in this case...
"We've been fighting for many years. Now we need time to get back together as a family. We also hope that the police will now look again into the murder of Jill Dando."
The Crown Prosecution Service defended its original decision to charge Mr George.
In a statement it said: "Mr George now has the right to be regarded as an innocent man. But that does not mean it was wrong to bring the case.
"Our test is always whether there is sufficient evidence for a realistic prospect of conviction; it would be wholly wrong only to bring cases where we were guaranteed a conviction."
The Met Police said it would reflect on George's acquittal and "consider how best to proceed".
Commander Simon Foy, head of Scotland Yard's homicide and serious crime command, said: "We are disappointed by today's verdict but especially disappointed for Jill's family and friends. However, we respect the decision of the court."
The prosecution had used a change in the law to introduce so-called bad character evidence at the retrial.
Jill Dando was one of the most popular presenters on television
They painted an image of Mr George approaching a series of women on the streets of Fulham.
No murder weapon was found by police.
But prosecutors presented evidence they said showed Mr George was a celebrity and gun-obsessed stalker with a grudge against the BBC, where he had worked as a messenger for a short time in the past.
He was said to have photographed hundreds of women and was described as a fantasist who told people he was the cousin of the late Queen singer Freddie Mercury.
When police searched his home in Crookham Road, officers found 2,248 photographs he had taken of women.
Prosecutors maintained that witness identification was the most important part of their case.
However, only one witness could be 100% sure that they had seen Mr George in Gowan Avenue - and that was more than four hours before the killing.
Defence counsel William Clegg QC pointed out the prosecution case was circumstantial and said there was no direct evidence that George was the killer.
Extracts from Barry George police interviews in 2000
The court heard that Mr George has an IQ of 75, in the lowest 5% of the population.
The jury at the retrial also heard the defendant had a history of medical problems and memory lapses and told police he had a "personality disorder".
Mr Clegg said: "The only reason that the prosecution say that this is the work of the local loner, the local nutter, the man with these serious psychological problems, is because that is the man they arrested.
"But if you look at the facts of the case they will give you a very different story."
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