Rauf's lawyer, Hashmat Habib, said on Wednesday: "The court has dropped charges of terrorism against him ... It's a big decision".
Habib said the said the prosecution had accused Rauf of possessing hydrogen peroxide with the intent of making bombs.
"I told the court that this is an antiseptic chemical that is also used for healing wounds," he said.
A court official confirmed that a judge in an anti-terrorism court in Rawalpindi ruled that Rauf's case did not "fall in the category of terrorism" and transferred it to a regular court for hearing criminal cases.
At the time of Rauf's arrest, Pakistan's foreign ministry named him as a "key member of [a] Britain-based network of militants."
Pakistani intelligence officials claimed Rauf had contacts with an Afghanistan-based al Qaeda operative who masterminded of the alleged scheme.
Rauf remains in detention and faces other charges including impersonation, forging documents and possessing explosives.
A civil court is due to hear the charges on December 20, he said.
"These are not serious charges and I hope he will be acquitted and freed if the government does not implicate him in other charges."
US officials said at the time the alleged plot to bring down up to 10 aeroplanes in a near simultaneous strike was "suggestive of an al-Qaeda operation".