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.
Her case has been deeply divisive in Pakistan where there is strong support for the blasphemy laws.
There is tight security in the capital, Islamabad, amid fears of violence. Hardline religious clerics have called on their supporters to take to the streets.
The ruling was read out by Chief Justice Saqib Nisar at the Supreme Court in Islambad.
“The appeal is allowed. She has been acquitted. The judgement of high court as well as trial court is reversed. Her conviction is set aside.”
Critics say Pakistan’s strict blasphemy laws have often been used to get revenge after personal disputes, and that convictions are based on thin evidence.
Asia Bibi’s case gained added prominence when a regional governor, Salman Taseer, who had appealed for leniency for her was murdered in a public square in Islamabad by his own bodyguard.
There are fears that there could be a violent response to her acquittal.
As with her previous trials and appeal large crowds have gathered outside the court in Islamabad on Wednesday demanding her conviction be upheld.
She has been offered asylum by several countries and was expected to leave the country if acquitted.
- Praise God for answered prayer.
- Pray that Asia and all those who made her freedom possible today remain safe.
- Pray that God will protect all Christians in Pakistan.