It also came at the end of a day in which the news was dominated by Bush's high-level talks with Vladimir Putin, the Russian president.
Federal judge Reggie Walton rejected Libby's bid on June 14 to remain free on bail while appealing his conviction, saying his lawyer had failed to show that he had a chance to win a reversal.
An appeals court on Monday rejected Libby's final request to remain free while he appealed his conviction.
Bush said that "with the denial of bail being upheld and incarceration imminent, I believe it is now important to react to that decision".
"Critics say the punishment does not fit the crime: Mr Libby was a first-time offender with years of exceptional public service and was handed a harsh sentence based in part on allegations never presented to the jury," he said.
Rudolph Giuliani, former New York mayor and Republican candidate for the 2008 presidential race, said Bush's decision was "reasonable" and "correct".
Joseph Wilson, former US envoy to Gabon, was sent by CIA to Niger in 2002 to probe claims Saddam Hussein tried to buy uranium for nuclear bombs. Concluded claims unfounded
George Bush used that "intelligence" to make case for war and invaded Iraq two months later
Wilson said officials manipulated intelligence to build case for war against Iraq; White House admitted Niger claims flawed
Wilson accused White House of retaliating by deliberately leaking to media that his wife, Valerie Plame, was undercover CIA agent
Libby denied leaking Plame's identity; grand jury found him guilty of obstructing investigations, perjury and lying to the FBI
Libby sentenced to 2 1/2 years in prison, $250,000 fine and two years probation; an appeals court later rejected request to stay out on bail while appealing sentence
Nancy Pelosi, the speaker of the House of Representatives, called Bush's decision a "betrayal of trust of the American people" while Harry Reid, the senate Democratic leader, called it "disgraceful".
Reid said that while the constitution gave Bush the power to commute sentences, "history will judge him harshly for using that power to benefit his own vice-president's chief of staff who was convicted of such a serious violation of law".
John Edwards, a Democratic presidential hopeful, said "George Bush and his cronies think they are above the law and the rest of us live with the consequences".
Bush's move came after intense pressure from conservatives who demanded he pardon Libby, vice-president Dick Cheney's former chief of staff, and saw him as the victim of an overly zealous special prosecutor.
Libby, 56, was sentenced to prison for lying and obstructing an investigation into who blew the cover of CIA officer Valarie Plame whose husband had criticised the Iraq war.
He also received a $250,000 fine and two years probation.
"He will remain on probation. The significant fines imposed by the judge will remain in effect," Bush said.
"The consequences of his felony conviction on his former life as a lawyer, public servant, and private citizen will be long-lasting."
Bush had often complained about leaks in Washington and vowed to take action against those who released unauthorised information to the public.
"There are too many leaks of classified information in Washington," he had said after the Plame news broke in 2003, vowing to fire anyone found responsible.
"And if there is a leak out of my administration, I want to know who it is."