A security official said that the barricades were now being taken down, but Sherry Rehman, a spokesman for Bhutto's party, said she had no information about the lifting of the order.
Shah said that the move had been a response to warnings from police that up to eight suicide bombers had infiltrated Rawalpindi; a "specific security situation" that he said had now passed.
More than 130 people died when two suicide bombers attacked Bhutto's welcome convoy in Karachi last month following her return from exile.
The US had criticised the detention of Bhutto, saying that the former prime minister and other politicians "must be permitted freedom of movement".
General Musharraf, the Pakistani president, imposed emergency rule on Saturday, citing the rise in tribal violence and political uncertainty in the country.
Hundreds of Bhutto's supporters had gathered in Rawalpindi on Friday, setting fire to tires in the streets and hurling stones at police, who responded with tear gas shells from an armoured personnel carrier.
Dozens were reportedly arrested.
Pakistan People's Party leaders have said police arrested 5,000 of its supporters since Wednesday in a bid to prevent the rally.
Police also arrested at least 30 workers from Bhutto's party outside her Islamabad home as she tried to leave.
Bhutto had appealed to police to let her through the cordon.
"I am your sister fighting for democracy," she told them.
The US has also called for those detained during protests against Musharraf's imposition of emergency rule to be released.
"I am very worried and angry - Musharraf should realise that we don't need him"
Avas, Islamabad, Pakistan
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"We remain concerned about the continued state of emergency and curtailment of basic freedoms, and urge Pakistani authorities to quickly return to constitutional order and democratic norms," Gordon Johndroe, a spokesman for the White House national security council, said.
In Peshawar, north-west of Pakistan, a suicide blast at the home of a Pakistani government minister killed four people, state-run Pakistan television said.
Amir Muqam, minister of political affairs, was unhurt in the blast.
"The bomber wanted to kill me, he came into my residence and clearly I was the target," Muqam told AFP news agency.
"I am not scared. I have survived two attacks in the past."
Police had earlier broken up a protest against emergency rule in the city.
Musharraf has cited the increase in violence by Taliban and al-Qaeda supporters, including suicide bombings and clashes in its troubled northwest, as one of the main reasons for the emergency.
On Thursday, Musharraf said elections would be held before February 15 and reiterated he would step down as chief of the country's army while maintaining the presidency.
National elections had originally been scheduled for January but appeared in jeopardy after Musharraf imposed emergency rule.
Unrest intensified in Pakistan in March this year after Musharraf's attempt to oust the country's chief justice, Iftikhar Chaudhry, led to protests.
The judge was later reinstated but then sacked and placed under house arrest following the Pakistani president's imposition of emergency rule.
Source: Al Jazeera and agencies