The Pope visited Paolo Gabriele in the Vatican police barracks to tell him personally of the pardon, the Vatican said.
Gabriele, a 46-year-old father of three, was subsequently freed and has returned to his family, Sky News reports.
The Holy See said it â€œintends to offer him the possibility to serenely restart his life together with his family,â€ but added the man would no longer live or work at the Vatican.
The Vatican spokesman described the Pontiffâ€™s meeting with his former butler as â€œintenseâ€ and â€œpersonal.â€
Gabriele was at the centre of one of the gravest Vatican security breaches in recent times.
The scandal bore all the hallmarks of a Dan Brown novel, exposing intrigue, power struggle and allegations of corruption inside the frescoed Vatican walls.
Gabriele was arrested on May 23 after Vatican police found heaps of papal documents in his Vatican City apartment.
On October 6 he was convicted by a Vatican tribunal of stealing the Popeâ€™s private papers and leaking sensitive documents that alleged corruption in the Holy See.
He had been serving his 18-month sentence in the Vatican police barracks.
Gabriele told investigators he had given the documents to a journalist because he thought that exposing the â€œevil and corruptionâ€ in the Vatican would put the Roman Catholic Church back on the right track.
The scandal turned into a major embarrassment for Benedictâ€™s pontificate and came to be known in the media as â€œVatiLeaks.â€
The Pope also pardoned a second Vatican employee, Claudio Sciarpelletti, who was convicted of aiding Gabriele.
The papal pardon had been expected.
In 1981, the late Pope John Paul II famously pardoned Turkish hitman Ali Agca, who tried to kill him in St Peterâ€™s Square. The Pope later met Agca in prison.