Asia Bibi was convicted in 2010 after being accused of insulting the Prophet Muhammad in a row with her neighbours.
She always maintained her innocence, but has spent most of the past eight years in solitary confinement.
The landmark ruling has already set off violent protests by hardliners who support strong blasphemy laws.
Demonstrations against the verdict are being held in Karachi, Lahore, Peshawar and Multan. Clashes with police have been reported.
The Red Zone in the capital Islamabad, where the Supreme Court is located, has been sealed off by police, and paramilitary forces have been deployed to keep protesters away from the court.
Chief Justice Saqib Nisar, who read out the ruling, said Asia Bibi could walk free from jail in Sheikupura, near Lahore, immediately if not wanted in connection with any other case.
She was not in court to hear the ruling, but reacted to the verdict from prison with apparent disbelief.
The trial stems from an argument Asia Bibi, whose full name is Asia Noreen, had with a group of women in June 2009.
They were harvesting fruit when a row broke out about a bucket of water. The women said that because she had used a cup, they could no longer touch it, as her faith had made it unclean.
Prosecutors alleged that in the row which followed, the women said Asia Bibi should convert to Islam and that she made three offensive comments about the Prophet Muhammad in response.
She was later beaten up at her home, during which her accusers say she confessed to blasphemy. She was arrested after a police investigation.
The Christian community has been targeted by numerous attacks in recent years, leaving many feeling vulnerable to a climate of intolerance.
Many of the attacks are motivated by blasphemy cases, but others have come in reaction to the US-led war in Afghanistan.
No-one has ever been executed under the laws, but some people accused of the offence have been lynched or murdered.
Asia Bibi, who was born in 1971 and has four children, was the first woman to be sentenced to death under the laws.
As with her previous trials and appeals, large crowds gathered outside the court in Islamabad on Wednesday demanding her conviction be upheld and the execution carried out.
She has been offered asylum by several countries and is expected to leave the country.
Her daughter, Eisham Ashiq, had previously that if she were released: “I will hug her and will cry meeting her and will thank God that he has got her released.”
But the family said they feared for their safety and would likely have to leave Pakistan.