The statement said the decision to grant him clemency had been made after considering Pennington's age, military experience, relative rank and level of involvement in the incident.
Pennington was one of eight US soldiers involved in the death of Hashim Ibrahim Awad, 52, who was taken from his home during a raid in April 2006 in the town of Hamdania and shot dead.
Prosecutors said Awad was murdered in cold blood and then his death covered up to make it look as if he was planting a roadside bomb.
All eight members of the military squad were initially charged with murder and kidnapping.
Five of them struck deals with prosecutors in exchange for testimony and received sentences ranging from one to eight years in prison.