Roque Fernandes (left) and Dominic Martins have walked free from court

They were arrested in September 2004 after trying to buy "red mercury" from an undercover reporter.

But Roque Fernandes, 44, Abdurahman Kanyare, 53, both of Edgware, and Dominic Martins, 45, of Stanmore, had denied three terror-related charges.

They denied being interested in a radioactive or toxic substance and claimed they had been tricked.

A joint statement by the defence solicitors said: "This is a great tribute to the jury system and English justice and a dark day for the News of the World."

This is a great tribute to the jury system and English justice and a dark day for the News of the World Defence lawyers What is red mercury? Is this end of 'fake sheikh'?

The court heard how Mazher Mahmood, better known as the News of the World's "fake sheikh", played the part of a Muslim, called Mohammed, who claimed to have nearly a kilogram of red mercury which he was looking to sell.

Mr Mahmood set up a meeting and then contacted officers from the Metropolitan Police's anti-terrorist squad, who arrested the men at the Holiday Inn in Brent Cross on 24 September 2004.

The three men were acquitted of two charges of trying to set up funding or property for terrorism.

They were also found not guilty of one charge of conspiracy to possess "a highly dangerous mercury-based substance" for the purposes of terrorism.

All three men had denied any involvement in terrorism and claimed their motives were innocent. Mr Kanyare said he was interested in a liquid called red mercury which could be used to wash discoloured money.

He said when Mohammed mentioned it was radioactive or toxic he "strung him along" because he thought he might be able to pass the information on to a Norwegian police officer whom he had helped in the past.

Tactics questioned

Defence lawyers criticised Mr Mahmood's tactics.

One described him as having an "egotistical obsession" for stories and accused him of being "charismatic and highly intelligent but...dangerously deceitful, ruthless, exploitative and corrupt."

Stephen Solley QC, defending Mr Martins, said justice had gone "out of the window" in a bid to sell newspapers.

He had urged the Recorder of London, Judge Peter Beaumont, to throw out the case - estimated to have cost upwards of £1 million - before the trial had even started.

Mr Solley also accused Mr Mahmood of serially misleading the police, Crown Prosecution Service, Customs and Excise and the courts.

He said that a witness in the case - known only as B, to protect his identity - had deliberately misled the three men into agreeing a deal, when they would not have done if they had known the truth.

All three defendants denied the charges

Mr Mahmood, who testified during the trial, denied manipulating the three defendants and setting up the covertly-recorded meeting to make them look like they were guilty.

A spokeswoman for the News of the World said the paper was "disappointed" with the outcome of the trial but was "entirely satisfied" that the investigation was conducted with "wholly proper" methods and in close liaison with the police.

"Our story resulted from a thorough and legitimate investigation by Mazher Mahmood, one of the paper's most senior and experienced reporters, whose exposes have led to over 200 convictions," she said.

A spokesman for the Metropolitan police said: "The fact that defendants have been acquitted does not mean the case was not properly brought to court.

"The Crown Prosecution Service assessed the evidence and decided there was a case to answer, a decision later confirmed by the trial judge.

"The Attorney General was required to give formal consent to the prosecution under the Terrorism Act 2000.

"The verdict is then a matter for the jury and we respect the decision they reached."

Mr Kanyare's solicitor, Paul Harris, paid tribute to both Judge Beaumont and the jury for the "scrupulously fair way" they had reached the conclusion of the highly complex case.

Mr Martins' solicitor, Paul Butcher, also said the verdicts were a great tribute to the jury system.

"Mr Martins now wishes to go back to his family from which he has been parted for two years," he said.

Somalian-born Mr Kanyare remains in custody over immigration issues.