By a 2-1 vote, the court ordered that Ahmed Omar Saeed Sheikh be released and rejected appeals by Pearl's family and a regional Pakistani government to keep him imprisoned.
The court also ordered that three other Pakistani nationals serving life sentences for Pearl's kidnapping and death also be freed. They were convicted of terrorism charges.
Sheikh, 47, has been on death row in Pakistan for 18 years since his conviction.
Pearl, a reporter for The Wall Street Journal, had been investigating terror group al-Qaida and so-called "shoe bomber" Richard Reid when he disappeared in Karachi, Pakistan, in January 2002. A gruesome video later surfaced that showed he was beheaded.
Last month, the provincial Sindh High Court downgraded Sheikh's conviction to kidnapping and ordered that he be released. The court also acquitted the other three. Thursday's Supreme Court ruling upheld the Sindh court's decision.
The Supreme Court's vote was partly based on a handwritten note from Sheikh in 2019 that acknowledged he'd played a "minor" role in Pearl's killing. It was the first time in nearly 20 years he'd admitted any involvement.
"Today's decision is a complete travesty of justice and the release of these killers puts in danger journalists everywhere and the people of Pakistan," the Pearl family said Thursday.
"We urge the U.S. government to take all necessary actions under the law to correct this injustice."
In December, then-Acting U.S. Attorney General Jeffrey Rosen said federal prosecutors were prepared to try Sheikh for Pearl's death in the United States.
On Thursday, Acting Attorney General Monty Wilkinson reiterated that stance.
"The United States stands ready to take custody of Sheikh to stand trial here on the pending charges against him," Wilkinson said in a statement. "He must not be permitted to evade justice."
He also said the release of those involved in Pearl's death was "an affront" to his family, to other terrorism victims around the world and to justice.
On Thursday, the Sindh prosecutor general handling the Pearl family appeal said the regional court would wait for an official written verdict before asking the Supreme Court to review the petition. Such reviews are rarely successful, he said.