Yettaw had earlier been returned to Yangon's Insein jail from hospital, where he had been receiving treatment after suffering a series of epileptic fits.
During the trial he told the court he had been on a mission from God to warn the opposition leader she was in danger of assassination by "terrorists".
In a surprise move Myanmar authorities allowed a handful of journalists to attend the final day of the trial alongside diplomats from selected countries.
Following the verdict Aung San Suu Kyi stood and thanked the diplomats for attending, saying "I hope we can all work for peace and prosperity of the country".
She was then driven back to her lakeside villa to serve the house arrest.
Aye Chan Naing, director of the Democratic Voice of Burma news organisation, told Al Jazeera that the verdict was "widely expected".
"My first response is obvious. The regime does not want Aung San Suu Kyi to be around in the 2010 election," he said from Oslo, the capital of Norway.
"They have reduced the sentence and want to show the international community that they are not that bad. But the fact is that - whether 18 months or three years or even one month - she is still in prison.
"The fact that she is still in prison [means] even after the 18 months they could extend another 18 months."
Aung San Suu Kyi's two female house companions and political aides, Khin Khin Win and Win Ma Ma, were also sentenced to 18 months house arrest.
'Peace and tranquility'
In a statement following the verdict, Than Shwe, Myanmar's senior ruling general, said he had reduced the sentences to "maintain peace and tranquility" and because Aung San Suu Kyi was the daughter of Aung San, a revered hero who won Myanmar's independence from Britain.
The sentence was quickly criticised by protests outside the Myanmar embassies in Bangkok and Tokyo, and by Gordon Brown, the UK prime minister, who said the verdict was "monstrous".
|The trial has been held amid tight security in Yangon's Insein jail [AFP]
Brown said he had no doubt the objective of the prosecution was purely political "to sever her bond with the people for whom she is a beacon of hope and resistance."
Tuesday's sentencing follows a series of delays in the stop-start trials of Yettaw and Aung San Suu Kyi.
The verdicts had been due to be announced on July 31, but at the last minute judges announced that they needed more time to review the case.
Analysts at the time said the delay was likely the result of Myanmar's military government being uncertain how to handle the case in the face of mounting international pressure.
Commenting on the verdict, Southeast Asia analyst Larry Jagan said the sentencing would be a "major setback" for international efforts to promote reconciliation between Myanmar's military rulers and the opposition.
But he added the question will be whether elements emerge within the military who are also unhappy with the decision.
'Prepared for worst'
Earlier Aung San Suu Kyi's lawyers said she had been "preparing for the worst" and diplomats had also predicted that the court at Yangon's Insein prison would hand down a guilty verdict after a two-and-a-half-month trial.
Critics have accused Myanmar's military government of using Yettaw's uninvited visit as an excuse to keep Aung San Suu Kyi locked up during elections that it plans to hold in 2010.
Her lawyers - who have not contested the facts of the case - had argued that the law used to charge her is invalid because it applies to a constitution abolished two decades ago.
They also said that government guards stationed outside Aung San Suu Kyi's compound should be held responsible for any intrusion in her property.
Ahead of Tuesday's verdict security was stepped up across Yangon and police vehicles patrolled the streets overnight, witnesses said.
The move follows warnings in the country's state media against any protests in case of a guilty verdict.
The case has drawn a storm of international criticism of Myanmar's military government, which is already targeted by US and European Union sanctions for its detention of more than 2,000 political prisoners, including Aung San Suu Kyi.
Myanmar's ruling generals have kept the opposition leader in detention for nearly 14 of the last 20 years, ever since they refused to recognise her National League for Democracy's (NLD) landslide victory in elections in 1990.
Myanmar has been under military rule since 1962 and the generals have shown no sign of releasing their iron grip.