Major-General Waheed Arshad, a military spokesman, said Kiani would take over as chief of army staff when Musharraf vacate the post.
The government said the pardon for politicians involved in graft cases between 1985 and 1999 was part of the president's "national reconciliation drive".
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Bhutto, who is set to return to Pakistan from exile on October 18, had demanded the charges be dropped.
They want the election to be carried out by a new assembly formed after a general election rather than the current legislature in which Musharraf's allies dominate.
Resignations
Earlier on Tuesday, Pakistani opposition members resigned en masse as two of Musharraf's political rivals filed new petitions in the Supreme Court challenging the general's eligibility to stand for the presidency.
Opposition members of parliament backed by hundreds of flag-waving supporters marched to the parliament to resign.
Opposition MPs refuse to legitimise Musharraf'sexpected re-election and have resigned [AFP]Imran Khan, the former cricketer and one of the leaders of the anti-Musharraf Alliance for the Restoration of Democracy, said: "This is the first step to discredit the election process."
The MPs and about 600 supporters, most of whom carried flags of the Jamaat-e-Islami party, marched from a parliamentary apartment building in Islamabad to the national assembly.They shouted slogans such as: "This is the end of your show - Go Musharraf, Go!" and "A friend of America is a traitor".
"After our resignation, Musharraf's success would have no value," Maulana Fazal-ur Rahman, leader of the opposition in parliament, said.
Musharraf is expected to win the poll but opponents hope that the planned resignations, numbering more than 80, will erode its legitimacy.