OAKLAND, Calif. (AP) _ Huey Newton, co-founder of the militant Black Panthers, has been found innocent of two counts of being an ex-felon in possession of handguns.

''I don't think justice was served,'' Deputy Attorney General Charles Kirk said after Friday's verdict, returned by a jury that had deliberated less than eight hours over two days.

Newton had faced a prison term of up to three years if convicted.

The case stemmed from an April 1985 raid on his Oakland house by state agents and Oakland police investigating an embezzlement case against Newton. While searching for records and documents, they found a .45-caliber semi- automatic pistol in a bedroom drawer and parts of a 9mm pistol in the basement.

As an ex-felon, Newton is prohibited from possessing concealable firearms.

Defense attorney Barry Morris argued that at the time of the raid Newton was not living at the house because of domestic problems with his wife.

Morris said Newton was living with his brother and the weapons belonged to Newton's wife, Fredrika.

In the embezzlement case, Newton faces nine counts of embezzling more the $50,000 in state education funds allegedly diverted from a former Black Panther-operated community school in Oakland to Newton's personal account.

It was second time Newton was charged with being an ex-convict in possession of handguns. He was convicted on two illegal weapons charges in 1978 and sentenced to two years in prison. However, he remains free on $250,000 bail while that case is on appeal.

His felony assault conviction for a 1964 stabbing was the basis of the 1978 and 1985 charges of being an ex-felon in possession of a pistol.

The pistol in 1978 was allegedly used in the pistol-whipping of Newton's tailor, but the jury that convicted him on the gun possession charge found him innocent of beating the tailor, who refused to testify.

Newton appealed, arguing that he was not a felon because he was unconstitutionally convicted of the 1964 stabbing. The assault conviction was later reversed, but a state Court of Appeal ruled that the conviction could be considered in sentencing for subsequent crimes.

Newton served two years for manslaughter in the slaying of an Oakland police officer in 1967 before the conviction was overturned on a technicality and he was ordered retried. The charges were dropped after two mistrials.

In 1974, Newton was accused of the fatal shooting of a 17-year-old prostitute. He jumped $42,000 bail and fled to Cuba. When he returned voluntarily three years later, two juries failed to reach a verdict in the slaying.