Police in Lahore, the country's second largest city, arrested Younas Masih, 34, and registered a case against him under the controversial blasphemy law on November 9, 2005.
It was alleged that Masih had uttered derogatory remarks about "Qawwalis" performed at a Sufi gathering that fell within the ambit of blasphemy.
In 2008, a court sentenced Masih to death and ordered him to pay a fine of Rs 100,000.
Masih subsequently challenged the sentence in the Lahore high court.
His counsel, Naeem Shakir, pointed out to the court that the FIR against Masih was registered a day after the incident was reported to police.
Shakir argued that police had failed to produce any "direct evidence" against Masih as their investigation was based entirely on hearsay.
The high court allowed the appeal and on Wednesday set aside the sentence and fine awarded to Masih, Shakir said on Thursday.
He is expected to be freed from prison shortly.
Blasphemy is a sensitive issue in Pakistan, where only about three per cent of the 180-million population are non-Muslims.
Mere allegations of blasphemy have triggered violence against minorities like Christians. Several persons accused of committing blasphemy have been lynched in recent years.
Last month, a mob of thousands of Muslims ransacked and torched some 200 homes in Joseph Colony, a Christian neighbourhood of Lahore, after a Christian man was accused of blasphemy.
Rights groups have said the blasphemy law, which carries the death penalty, is often misused to persecute minorities and to settle personal scores.
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