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.
The senior Democrat in the US senate condemned the move as "disgraceful".
"The president's decision to commute Mr Libby's sentence is disgraceful," senate Democratic leader Harry Reid said.
"Libby's conviction was the one faint glimmer of accountability for White House efforts to manipulate intelligence and silence critics of the Iraq war.
"Now, even that small bit of justice has been undone."
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".
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.
His decision to commute his sentence, instead of an outright pardon, was a nod to the fact that the court process for Libby had not yet run its course, but it was unlikely to quell criticism.
Libby was sentenced to prison for lying and obstructing an investigation into who blew the cover of a CIA officer whose husband had criticised the Iraq war.
He also received at $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."
A federal judge ruled last month that Libby would have to report to prison in six to eight weeks.
An appeals court on Monday rejected Libby's request to remain free while he appealed his conviction.