Libby, a former aide to Dick Cheney, the vice-president, still has a felony conviction on his record, two years on probation and a $250,000 fine.
'Betrayal of trust'
Nancy Pelosi, the speaker of the House of Representatives, called Bush's decision on Monday 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".
Tony Snow, White House spokesman, dismissed charges of cronyism, saying: "The president does not look upon this as granting a favour to anyone, and to do that is to misconstrue the nature of the deliberations."
Asked whether Cheney had pressed Bush to commute Libby's sentence, Snow said: "I don't have direct knowledge. But on the other hand, the president did consult with most senior officials, and I'm sure that everybody had an opportunity to share their views."
Bush's move came after intense pressure from conservatives who demanded he pardon Libby and saw him as the victim of an overly zealous special prosecutor.
"While for a long time I have urged a pardon for Scooter, I respect the president's decision. This will allow a good a man who has done a lot for his country to resume his life," Fred Thompson, a former Republican senator who helped raise money for Libby's defence, said.
Rudolph Giuliani, former New York mayor and Republican candidate for the 2008 presidential race, said Bush's decision was "reasonable" and "correct".
Monday's announcement came just hours after an appeals court rejected Libby's final request to remain free while he appealed his conviction.
Cheney's former chief of staff 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.