BBC Local Government Correspondent Rory McLean: "As far as the auditors are concerned, the case is not yet closed"

The former leader of Westminster City Council and her former deputy, David Weeks, will not have to pay a �27m surcharge.

Dame Shirley kissed her counsel and said: "It's a great victory. I have great faith in British justice."

The court must now decide whether to demand costs from Westminster council.

Westminster sold homes in marginal wards

The Tesco heiress had been found guilty by District Auditor John Magill of "wilful misconduct" and "disgraceful and improper gerrymandering" over the sale of council homes in marginal wards between 1987 and 1989.

Appeal judge Lord Justice Kennedy, sitting with Lord Justice Schiemann and Lord Justice Robert Walker, backed her case by a two-to-one majority.

Speaking after the hearing, Dame Shirley said: "I am pleased that the Court of Appeal listened to the facts and agreed that I did nothing wrong, did not lie, I always followed advice.

John Andrew: "A crushing blow to the auditor"

"There was no gerrymandering in Westminster."

In a prepared statement, Dame Shirley said the late vice-chairman of the council's housing committee Michael Dutt, who shot himself, should not be forgotten.

She said he had killed himself "under pressure from the auditor's investigation", adding: "Officers and councillors have had their careers ruined."

She said: "I hope the Audit Commission will now draw a line under this 10-year-long case and not waste further millions of local taxpayers' money to finance this political vendetta."

Lord Justice Kennedy and Lord Justice Schiemann found there had been no wilful misconduct by Westminster councillors and that their policy of promoting home ownership by selling council homes had been lawful.

John Magill: Investigation took seven years

Lord Justice Kennedy said it was unreal to suggest that any councillors who allowed electoral advantage to cross their minds when making a decision were guilty of misconduct.

Lord Justice Schiemann criticised Mr Magill's decision to hold a press conference to put over his provisional views on the investigation as "ill conceived and unfortunately executed".

But he said the court accepted Mr Magill did have an open mind and his "error of judgement" did not demonstrate bias on his part.

Lord Justice Walker dissented, but he indicated that he would have reduced the figure from �27m to �7m.

The result is a crushing blow to Mr Magill who spent �3m and seven years conducting the biggest ever inquiry into alleged misconduct in local government.

He is now seeking leave to appeal to the House of Lords.

During the five-day appeal hearing, Lord Lester QC, representing Dame Shirley, told the judges that Mr Magill had used "strident, pejorative, florid language" at an "ill conceived" press conference after he had completed the inquiry in January 1994.

'Mired' reputation

Mr Magill had ruled that Dame Shirley and her Conservative colleagues abused council housing policy to boost their party's vote in the London borough.

Lord Lester said mud had undoubtedly stuck to Dame Shirley and "entirely mired her political and personal reputation across the country".

Karen Buck, Labour MP for Regents Park and Kensington North, said the hearing in "no way diminishes the massive damage done to communities and the homeless" in Westminster as a result of Dame Shirley's policies.