The row is seen by some as Gen Musharraf's biggest challenge
Iftikhar Chaudhry was suspended by the president in March amid claims of corruption, but the Supreme Court on Friday quashed all charges.
Mr Chaudhry has now become a focus of opposition to Gen Musharraf.
Gen Musharraf, who seized power in 1999, is facing mounting criticism of his rule and a wave of violence.
"The president respects the decision of the Supreme Court," Gen Musharraf's spokesman was quoted as saying by the state-run Associated Press of Pakistan.
"The president has stated earlier that any judgement the Supreme Court arrives at will be honoured, respected and adhered to," the spokesman said.
The government also said the case had no political motive.
Jubilant crowds
On Friday, the Supreme Court judges ruled by 10 votes to three to quash all charges against Mr Chaudhry, calling his suspension "illegal".
Delivering the court's verdict, presiding Judge Khalil-ur-Rehman Ramday said: "The reference [against Mr Chaudhry] has been set aside and the chief justice has been reinstated."
Lawyers applauded the ruling as it was read out, and jubilant crowds outside the court shouted chants of "Go Musharraf, go".
Mr Chaudhry's lawyer, Aitzaz Ahsan, told reporters: "He has been restored and it is a victory for the entire nation."
Judge Chaudhry is a staunch opponent of Gen Musharraf
Officials alleged that several people had complained to the president that Mr Chaudhry had misused his office and received favours. In particular, he was alleged to have procured a top police job for his son.
But critics say the government has not shown similar zeal in pursuing more serious charges - such as financial embezzlement and property fraud - against other top judges.
They have been accusing the president of plotting to remove an independent-minded judge to forestall legal challenges to his plan to ask parliament for another five-year term in office.
Mr Chaudhry's suspension in March triggered mass protests.
He has become a highly controversial figure in recent months as he has toured the country.
Although he has not directly criticised Gen Musharraf, his campaign road show has definitely taken on the feel of a political campaign, the BBC's Dan Isaacs in Islamabad says.
The judicial crisis has been overshadowed by the recent siege of Islamabad's radical Red Mosque and a spate of bombings that have killed scores of people.
Chief Justice Iftikhar Chaudhry 
The 13 member larger bench of the Supreme Court of Pakistan reinstated Justice Iftikhar Muhammad Chaudhry as Chief Justice of Pakistan on Friday through a short order. The verdict was reached 10 to 3 in favor of Justice Chaudhry. 

Justice Iftikhar Muhammad Chaudhry through a panel of senior lawyers headed by Barrister Aitezaz Ahsan filed a constitutional petition challenging his suspension as Chief Justice of Pakistan by President General Pervez Musharraf on March 9 this year. Musharraf has indicated that he will accept the court's decision.

The Pakistani lawyer community hailed the decision of the court. The Peshsawar High Court Bar Association organized even organized a procession as a mark of celebrations.

Chaudhry, an opponent of Musharraf, had been accused of abuse of power but the charges were quashed by the court's decision, seen as a blow to Musharraf's government.