Prosecutors in Kirov, a sleepy city 900 kilometres (560 miles) northeast of Moscow thronged by dozens of reporters for the hearing, had sought a six year prison colony sentence.
Anti Kremlin activists responded with dismay to the verdict, slamming it as the latest effort by Putin to snuff out the slightest hint of opposition to his 13 years of rule.
“It is completely fabricated from start to finish and even the judge could not say what the reason for the crime was, what was the point,” former cabinet minister and anti Kremlin activist Boris Nemtsov, who was in court, told reporters.
Ex-finance minister Alexei Kudrin, who retains contacts with Putin, wrote on Twitter that the sentence “is not so much a punishment, but aims to isolate him from public life and electoral process.”
Top rights group Memorial said the country “now has one more political prisoner”.
Khodorkovsky, who is still in jail, said in a statement released through his lawyers that the verdict was “predictable”.
The verdict will remove Navalny, who was on Wednesday registered to run for Moscow mayor, from politics once the appeals process is exhausted.
His campaign chief Leonid Volkov said he expected now that Navalny would pull out of the Moscow mayor race. In theory, he could continue to campaign for the September 8 polls until the appeals process is over.
The EU’s top diplomat Catherine Ashton expressed her concern about the Navalny verdict in a statement, saying the outcome “raises serious questions as to the state of the rule of law in Russia”.
Her comments were echoed by the US ambassador to Moscow. “We are deeply disappointed in the conviction of Navalny and the apparent political motivations in this trial,” Michael McFaul wrote on Twitter.
Germany’s coordinator on Russia, Andreas Schockenhoff, meanwhile described the legal proceedings against Navalny as a “show trial”.
Anti Putin activists vowed to stage protests against the verdict outside the Kremlin walls on Thursday, but the Moscow municipality warned against such actions.
“No application for permission has been received and this will be seen as an illegal event,” said the head of the Moscow security department, Alexei Mayorov, quoted by the state ITAR-TASS news agency.
Navalny has said he wants to challenge Putin in the next presidential elections in 2018 and coined the phrase “the party of crooks and thieves” to describe the ruling United Russia party.
In a typically uncompromising gesture, Navalny this week published a detailed report accusing one of Putin’s closest allies, the head of Russian Railways, Vladimir Yakunin, of possessing vast undeclared property and business assets.
Navalny has become a hero for many in the Internet savvy middle class who yearn to live in a different Russia but has also yet to win wide recognition beyond his powerbase in Moscow.