"UN war crimes court has lost all credibility", Ljajic told Beta news agency, adding that "today's decision is proof of selective justice which is worse than any injustice".

"The appeals decision is a move backwards and the public opinion of the tribunal (in Serbia) will be worse than it already is," Ljajic said.

"We are a long way from reconciliation and there is no justice for the victims," he added.

Serbia's war crimes prosecutor also dismissed the "scandalous decision"of the International Criminal Tribunal for the former Yugoslavia (ICTY) in The Hague.

Vladimir Vukcevic said it was "incomprehensible from a legal standpoint" how the UN court could arrive at two "completely opposed" verdicts examining the same evidence.

Gotovina and Markac, considered heros in Croatia, were last year jailed for 24 and 18 years respectively for the murder of Croatian Serbs during their country's struggle for independence and the bloody, ethnically driven break-up of Yugoslavia.

But on Friday the appeals court found that the initial convictions had been based on the false premise that any artillery that landed on Serb-inhabited towns and was more than 200 metres (yards) from a military target was an unlawful attack on civilians.

The events listed in the charges against Gotvina and Markac "are some of the worst war crimes committed in the former Yugoslavia: murders, deportations and threats against hundreds of thousands of people", the Serbian prosecutor said.

Gotovina led a key military operation in which Croatia regained the Krajina territory held by rebel Serbs. That action effectively ended the 1991-95 war sparked by Zagreb's proclamation of independence from the former Yugoslavia.

UN prosecutors said 324 people were killed during the operation which sparked an exodus of some 90,000 Croatian Serbs from the Krajina.