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JERUSALEM (Reuters) - Israel's Ehud Olmert was acquitted of major corruption charges on Tuesday but convicted of breach of trust, a lesser offence, in what was widely seen as a stunning victory for the former prime minister.
Olmert resigned as the country's leader in 2008 after the allegations surfaced, cutting short his pursuit of a peace deal with the Palestinians.
The three-judge court's rejection of key accusations that drove the veteran politician from office raised questions in Israel about whether prosecutors had been overzealous in effectively bringing down a sitting prime minister.
"There is justice in Jerusalem," a gaunt-looking Olmert, 66, said after the ruling. Smiling broadly, he left the courthouse to a smattering of applause, hugging and kissing well-wishers.
The verdict, which defied widespread expectations of a full conviction, capped the first criminal trial of a former Israeli premier - proceedings that grabbed headlines with accounts of Olmert pocketing cash-stuffed envelopes and enjoying a lavish lifestyle of expensive cigars and luxury hotels.
The court found Olmert not guilty of charges that he received, as a cabinet minister and Jerusalem's mayor before becoming prime minister, $150,000 in bribes from a U.S. businessman and defrauded Israeli charities by double-billing them for overseas fundraising trips.
But it said he was in breach of trust when, as trade and industry minister, he green-lighted projects that involved one of his long-time friends.
The conviction carries a maximum penalty of three years' imprisonment, and the court said it would begin hearing arguments on sentencing in September.
Olmert, addressing reporters outside the court, described the offence as a "procedural irregularity, not corruption".
Any thoughts of a return to politics would likely depend on the severity of his sentence and the outcome of a separate bribery case over his role, as Jerusalem's mayor from 1993 to 2003, in the building of the huge Holyland housing complex widely considered to be the city's biggest eyesore.
Olmert has denied any wrongdoing.
"If Olmert comes out clean ... he will most definitely consider a political comeback, if not in the upcoming elections, then in the next," political commentator Yossi Verter wrote on the website of the Haaretz newspaper.
When he announced his resignation in September 2008, Olmert, who took over the leadership of the centrist Kadima party and the premiership in 2006 after then-prime minister Ariel Sharon suffered a stroke, said he would battle to clear his name.
He stayed on as caretaker until March 2009 when Prime Minister Benjamin Netanyahu's government was sworn in.
Olmert, who waged war against militants in Lebanon in 2006 and the Gaza Strip in 2008, said he had achieved significant progress in talks with the Palestinians aimed at securing a final peace deal, offering an Israeli withdrawal from much of the occupied West Bank.
But no agreement was reached and subsequent negotiations held under Netanyahu collapsed in 2010 in a dispute over Israeli settlement building on land Palestinians want for a state.
"I think one can't ignore the far-reaching ramifications in Israel and outside it as a result of the decision to bring me to trial," Olmert said after the verdict, hinting at diplomatic moves he was never able to make.
Ruling on some of the most serious charges in the case, the court said prosecutors had failed to prove that payments Olmert received, before he became prime minister, from New York-based businessman Morris Talansky were illegal.
It also found he had broken no laws in helping to arrange meetings between Talansky, who ran a mini-bar business, and hotel owners Olmert knew.
The Israeli newspaper Haaretz described the verdict as a "crushing defeat" for the prosecution. The popular Ynet news site called the outcome a "legal earthquake".
Israel has already witnessed a former head of state put behind bars.
Former president Moshe Katsav was convicted last year of raping an aide when he was a cabinet minister in the late 1990s and molesting or sexually harassing two other women who worked for him during his 2000-2007 term as president. He began serving a seven-year prison sentence in December.
Editing by Crispian Balmer and Alessandra Rizzo