Chief Magistrate Howard Riddle cleared the 31-year-old Chelsea skipper at the end of a five-day trial at Westminster Magistrates’ Court in London.
Terry, wearing a white shirt with a grey suit and tie, left court without speaking to media or supporters waiting outside.
He was accused of branding Queens Park Rangers player Anton Ferdinand a “fucking black cunt” during a match between Chelsea and QPR on October 23 last year.
Terry denied committing a racially aggravated public order offence. He told the court that he was sarcastically repeating words he thought Ferdinand had said to him.
The charge was brought by the Crown Prosecution Service, the state prosecutors in England and Wales.
Alison Saunders, the chief crown prosecutor for London, said in a statement: “The very serious allegation at the heart of this case was one of racial abuse.
“It was our view that this was not ‘banter’ on the football pitch and that the allegation should be judged by a court.
“The chief magistrate agreed that Mr Terry had a case to answer, but having heard all of the evidence he acquitted Mr Terry of a racially aggravated offence.
“That is justice being done and we respect the chief magistrate’s decision.”
Had Terry been found guilty, he could have been fined up to £2,500 ($3,850, 3,150 euros).