Estrada, 70, has been under house arrest since he was ousted as president in 2001 and Arroyo, then his vice-president, took his place.
An anti-graft court jailed him for life in September but allowed him to remain under house arrest pending an appeal.
Officials said Estrada would be freed on Friday morning, after the court had received a copy of the presidential order.
Estrada's son, Senator Jinggoy Estrada, said: "I would like to thank this administration, specifically President Gloria Macapagal Arroyo, for granting this pardon. This is coming from my heart."
|"She did this for her own political survival, not for the interest of the nation"|
Joe Dizon, a Catholic priest and vocal critic of Arroyo
However, he brushed aside the idea that his father's pardon would influence the opposition party into pursuing accusations of bribery and kickbacks in Arroyo's administration any less.
"As a senator I will continue to do my duty," he said. "If there are anomalies in this government, I will continue to expose it."
The pardon came despite a warning by Fidel Ramos, another former president, saying that it was too soon to pardon Estrada.
Joe Dizon, a Catholic priest that is a vocal critic of Arroyo, said: "She did this for her own political survival, not for the interest of the nation.
"She can no longer govern effectively. All her actions are for political survival."
The senate is inquiring into allegations of government kickbacks in a $330m telecoms deal and the names of both Arroyo and her husband have come up.
Newspapers have also said legislators and other senior elected officials loyal to Arroyo each received 200,000 to 500,000 pesos ($4,500 to $11,300) after a meeting with the president earlier this month.