In what was seen as a test case for press freedoms in newly democratic Indonesia, a court cleared two journalists of libel but said the article they wrote was defamatory.

The ruling on a case filed by a well-connected businessman against the Tempo news magazine will be welcomed by rights activists, however the verdict leaves uncertain the fate of the magazine's editor, who may now be held responsible.

Judge Suripto said an article written by reporters Ahmad Taufik and Teuku Iskandar Ali about businessman Tommy Winata was libelous but the two could not be held responsible for its publication.

Winata accused Tempo, a Time magazine lookalike with a reputation for investigative reporting, of defaming him in a story in March 2003 which he claims insinuated he used arson in the hope of winning a rebuilding contract.

Ahead of Thursday's hearing, rights groups led by Amnesty International had condemned the case, saying it marked a step backwards for Indonesia as the country was emerging from years of censorship into democracy.

It said the court's use of the criminal code to hear the case instead of a standard press law, meaning the defendants faced possible jail terms, was unwarranted as the Tempo staff has undertaken fair and balanced reporting.

Speaking after the verdict, journalist Ali said he suspected that the government had intervened in the case ahead of voting on Monday because a guilty verdict could damage President Megawati Sukarnoputri's election hopes. "It's part of a promotion ploy from the Megawati government," he said.

Taufik said he feared judges would now place the blame on editor Bambang Harimurti for allowing the article to be published. The verdict on Harimuti is scheduled to be delivered later Thursday.

The hearing at the Central Jakarta district court was attended by supporters of both sides in the dispute, including media watchdog activists. "Free press, yes. Lying press, no," read a banner carried by Winata's supporters, while free press activists countered with a poster declaring: "Media freedom is your freedom".

Tempo had already lost four of seven cases involving Winata and was ordered to pay more than 1.5 million dollars in damages to the businessman over other reports. Two verdicts have been overturned on appeal.