A decree signed by the Ilham Aliyev on Thursday stated that Haji Alikram Aliyev was being granted an amnesty to coincide with the holy month of Ramadan.
The Islamist leader was jailed last year after his supporters clashed with police.
The decree added the decision had been taken after the intervention of Sheikhallah Shukyur Pashazade, spiritual head of Muslims in the Caucasus.
Alikram Aliyev was arrested in May 2002 after residents in the town of Nardaran, near Baku, rioted with police during protests about poor living conditions. His party's registration was withdrawn soon after.
The authorities said the unrest in Nardaran, which is the site of a Shia shrine, had been fomented by "Islamic fundamentalists" trying to overthrow Azerbaijan's secular regime.
Several other people who were jailed following the violence in Nardaran remain behind bars, although officials say more of them may be pardoned by the end of this year.
There was an outcry after the
discredited October elections
Meanwhile, the leading opposition party in the former Soviet republic was evicted from its offices on Thursday.
Staff of the Musavat Party vacated their premises in the capital, Baku, after a court upheld a ruling that the building was of special architectural interest.
The Musavat Party has been given alternative premises elsewhere in the city. The party's leader, Isa Gambar, came second to President Aliyev in a widely discredited October election.
The vote was followed by violence between police and opposition supporters, who claimed the election had been rigged in Aliyev's favour.
Since then dozens of Musavat members have been arrested on public order charges.
A human rights group said the closure was part of an official campaign to intimidate the opponents of President Aliyev.
Peter Bouckaert, of the New York-based group Human Rights Watch, said the eviction was "another nail in the coffin of the opposition in Azerbaijan. This is part of a wholesale campaign of intimidation of the opposition".