Asia Bibi was sentenced to death on 7 November 2010 by a Punjab court.
Bibi was set to be released immediately according to the court, although there was no word if any security arrangements were being made for her protection.
After a nine-year-long battle, Asia Bibi, a Christian mother, is free to go.
"I am very happy".
"We are very happy".
Chief Justice Saqib Nisar, who headed a special three-judge bench set up for the appeal, cited the Koran in the ruling, writing that "tolerance is the basic principle of Islam" and noting the religion condemns injustice and oppression.
In February, Bibi's husband Ashiq Masih and one of her daughters met with Pope Francis to beg for his help.
The top court in a landmark decision on Wednesday overturned Bibi's 2010 conviction on blasphemy charges. "We are not going to step back", radical Islamist party Tehreek-e-Labbaik Pakistan (TLP) - which had threatened the judges with dire consequences if Asia Bibi was acquitted - said in a statement.
One Islamic cleric closely associated with the TLP, Pir Afzal Qadri of the Aalmi Tanzeem Ahle Sunnat, issued a fatwa that any judge acquitting Asia Bibi should be punished by death.
Asia was arrested in 2009 after she took a sip of water from a cup she got for her fellow farm workers. She was reported to authorities by a Muslim woman and an Imam for the insult.
Punjabi governor Salman Taseer was assassinated for speaking out on Bibi's behalf and calling for the country's blasphemy laws to be overhauled.
Some protesters appeared unsure of the nature of Aasia Bibi's crime, but were certain that she should be put to death.
The mere rumour of blasphemy can ignite mob violence and lynchings in Pakistan, and combatting alleged blasphemy has become a central rallying cry for hardline Islamists.
Later on Friday, telephone networks were down in the capital, Islamabad, and the eastern city of Lahore, where pockets of TLP protesters blocked main roads. They also burned cars and ransacked shops.
Interior Minister Sheharyar Afridi said Friday that officials were trying to persuade Islamists to disperse their rallies peacefully.
Earlier, during the day, some 5,000 Islamists rallied in the capital, Islamabad, and almost 4,000 demonstrators staged a sit-in in the eastern city of Lahore, demanding that Bibi's acquittal verdict be overturned. She had spent eight years seeking mercy from appeals courts while imprisoned on death row. In previous hearings her attorney, Saiful Malook, pointed to contradictions in testimony from witnesses.
Insulting the Prophet Muhammad is punishable by death under Pakistani law, and dozens have been killed following accusations, some by angry mobs.
The three-judge panel upheld the blasphemy law itself, saying it was consistent with verses from Islam's holy book, the Quran. "Asia Bibi acquitted of charges", said Justice Nisar.
Blasphemy laws are reportedly used to settle scores or to persecute religious minorities; while non-Muslims constitute only 3% of the Pakistani population, 14% of blasphemy cases have been levied against them. Bibi's case was closely followed internationally amid concern for Pakistan's religious minorities, who have frequently come under attack by extremists in recent years.