The 12-member jury, on its seventh day of deliberation, rebuffed the death penalty, saying they believed he had played a minor role and had limited knowledge of the attacks.
Instead, they sentenced Moussaoui, the only person to be tried in the US in connection with attacks on New York's World Trade Center and the Pentagon in Washington, to spend the rest of his life in prison without parole.
The 12 jurors found that Moussaoui, 37, entered the United States aiming to 'kill as many Americans as possible,' but they failed to agree that his actions resulted in the deaths on September 11.
For a death sentence, the jury's decision on those points - cited as aggravating factors by prosecutors - would have had to been unanimous, court spokesman Edward Adams told reporters.
Symptomatic of disagreement over the decision, one juror sat with his head down, shaking it back and forth, as the decision was being read in the courtroom.
Reached after four years of often-delayed proceedings, the verdict was a setback for the US government. Prosecutors had sought a death sentence, arguing that Moussaoui knew about the plot but withheld his knowledge from FBI agents after his arrest three weeks before the attacks.
'America, you lost ... I won,' Moussaoui said, clapping his hands, after the judge and jury had left the courtroom.
Moussaoui showed little emotion, smirking as the complicated ruling was read in court. But after Judge Leonie Brinkema called him an 'incredibly difficult client,' he stood up and flashed a V-for- victory sign.
Five jurors concluded that Moussaoui had played a minor role in the September 11 attacks, and three jurors wrote in an added mitigating factor against the death sentence: that Moussaoui had limited knowledge of the 9/11 attack plans.
The jury waded through a 42-page check list of factors for and against Moussaoui's execution, and voted heavily - but not unanimously - in favour of the prosecution's charges.
Inside the courtroom were family members of people killed in the attacks. Some had rushed to the federal court house across the Potomac River from the nation's capital to witness the judgement.
Afterwards, Carie Lemack, whose mother Judy Larocque was a passenger on board American Airlines Flight 11 that crashed into the World Trade Center, hailed the decision for life in prison.
'I'm glad the jury recognized this man was an al-Qaeda wannabe who could have never put together the attacks on 9/11,' she told reporters outside the courtroom. 'He's a wannabe who deserves to rot in jail.'
She the real efforts shoudl be put on capturing al-Qaeda leader Osama bin Laden. She said her mother would have been proud of the jury for its decision and called for increased security for nuclear material and in the transport industry.
US President George W. Bush said the verdict represented an end to Moussaoui case but 'not an end to the fight against terror.'
'We have had many victories, yet there is much left to do, and I will not relent in this struggle for the freedom and security of the American people,' Bush said.
Moussaoui, a French citizen of Moroccan descent, had declared that he wanted to be put to death for the crime, and a major fear of the death sentence had been the martyrdom that may have resulted among the worldwide network of militant terrorists who carry out suicide attacks in the name of Islam.
But the jury said that fear did not factor into their decision, Adams said.
The division on the jury over the death penalty echoed divisions among victims' family members. Some, like Abraham Scott, whose wife had been a senior budget analyst at the Pentagon, said in broadcast remarks before the verdict was released that he wanted the death penalty.
But afterwards, Scott told reporters he 'wholeheartedly agreed' with the jury, and that justice had been served and brought 'closure to me.'
Referring to his late wife, and appearing to choke with tears as he described an imaginary conversation with her, he said: 'I just said, 'Baby, at least one perpetrator has been brought to justice and I hope that you are looking down upon us and are very pleased with what transpired today'.'
The verdict was a victory for Moussaoui's defence attorneys, who worked 'under incredibly difficult conditions' with their client, Brinkema said. Moussaoui had insisted his lawyers were selling him out and wanted him to die.
The lawyers dug out mitigating evidence about his abuse as a child and his psychotic family background to save him, and nine of 12 jurors agreed that it was important.
One of the defence attorneys, Edward McMahon, told reporters that the jury's verdict reflected 'deep divisions over capital punishment' in the country.
In Paris, Justice Minister Pascal Clement said he told his US counterpart Alberto Gonzales in March that France opposed death for Moussaoui. France 'takes note' of Wednesday's verdict, Clement said.
Tim Roemer, former 9-11 Commission member, said he expects the verdict will generate controversy.
'There will lots of opinions whether this was the right or the wrong decision,' he told Cable News Network (CNN). But he said the verdict showed that US justice works and expressed hope it would bring closure to September 11 families.
Moussaoui will be sent to a maximum security federal security, and the final sentence will be read by Brinkema at 1400 GMT Thursday.
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