The England international, who denied the charge, was alleged to have made the comments during a Premier League game at Loftus Road last October.
Delivering the verdict Chief Magistrate Howard Riddle said: “The issue for the court is not to decide whether Mr Terry is a racist - I have received unchallenged evidence he is not.
“The issue is whether Mr Terry uttered the words as an insult.“
However, the judge then went on to add that: “The only verdict the court can record is Not Guilty.
“Even with all the help received, it is impossible to be sure exactly what were the words spoken by John Terry at the relevant time
“It is a crucial fact that nobody has given evidence about what Mr Terry said or how he said it.”
The Chief Magistrate went on to describe Ferdinand as “brave” to give evidence and added that: “Overall I found Anton Ferdinand to be a believable witness on the central issue.”
After the verdict was announced the Crown Prosecution Service stated: "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."
Terry, who was stripped of the England captaincy over the affair, left court without a word for the assembled media but Chelsea chairman Bruce Buck added: "Chelsea football club notes that of course we respect the decision of the magistrate today.
"We are pleased that John can now put his mind to football and go back to training and do what he has done for many years."
A statement released by the FA confirmed the governing body will continue its own investigation into the incident.
"The FA notes the decision in the John Terry case and will now seek to conclude its own enquiries. The FA will make no further comment at this time."