Reading out the verdict on Wednesday, Chief Justice Mian Saqib Nisar said: "The judgement of the high court and that of the trial court is reversed".
"Her conviction is set aside and she is to be relieved forthwith if not required in other charges".
On the day the court reserved its judgment, Saiful Malook, counsel for Aasia Bibi, had argued that the appellant had not committed blasphemy and was being "persecuted due to her religious beliefs".
Bibi's legal team celebrated the court's decision amid beefed-up security in Islamabad after religious hardliners had vowed to protest any acquittal of the case.
Blasphemy against Islam and its Prophet is a sensitive subject in Pakistan, where the crime can carry a compulsory death sentence.
Blasphemy is an incendiary charge in deeply conservative Muslim Pakistan, where even unproven allegations of insulting Islam and its Prophet Mohammed can provoke a violent and bloody death at the hands of vigilantes.
In 2010, Punjab's then-governor Salmaan Taseer and then-federal minister Shahbaz Bhatti were both killed for championing Bibi's cause.
Con dibujitos explicó lo que mamás pasan mientras los padres duermen
Los dibujos se convirtieron en furor debido a que muchas mujeres se sintieron identificadas con la situación que vive esta madre . Hasta el momento la publicación fue compartida más de 200 mil veces y acumuló más de 60 mil comentarios.
She had been accused by three women who had an argument with her over fetching water at the farm they worked at back in June 2009 - refusing to drink from a bucket she had touched because she was not Muslim.
The alleged incident occurred when Bibi took a sip of water while she was working. Dozens have been killed following blasphemy claims, sometimes by mobs of men. She had moved the Supreme Court against her conviction.
In February, Bibi's husband Ashiq Masih and one of her daughters met with Pope Francis to beg for his help.
The trial of Bibi, who is an illiterate mother of five, has become a test case for Pakistan's commitment to protect its minorities, which have born the brunt of blasphemy accusations. "I just don't know what to say, I am very happy, I can't believe it".
Internationally, Bibi's case has generated outrage.
The ultra-Islamist Tehreek-e-Labaik Pakistan (TLP) party, which makes punishing blasphemy its main campaign rallying cry, earlier this month warned the court against any "concession or softness" for Bibi.