The former deputy prime minister, confined to a wheelchair because of a back complaint, used his first few minutes of freedom to urge the country's recently installed prime minister to drive harder on reform.

Wearing a broad smile over his neck brace, Anwar held an impromptu news conference inside the domed Islamic-style courthouse, as hundreds of supporters rallied outside, raising his old battle cry of "Reformasi" -- the reform movement he led before his 1999 jailing.

"Thank you, may Allah bless you," Anwar, 57, told the judges after the decision. His lawyers shouted "Allahu akbar" -- Allah is greatest -- after the court adjourned, closing a chapter in one of the nation's most extraordinary political sagas.

"Thank Allah it's over," Anwar added, turning to address reporters. "I have to give credit to the new prime minister for not interfering with the judiciary ... I appeal to Prime Minister Abdullah Badawi to make the necessary reforms."

Before his jailing, Anwar was a lightning rod for disaffected Malays, the country's majority ethnic grouping that dominates politics, and turned against the then prime minister, Mahathir Mohamad, who was instrumental in both his rise and fall.

The decision could be a defining moment for the leadership of Abdullah, who succeeded Mahathir a year ago and won a landslide election victory in March on an agenda of tolerance and a pledge to clean up corruption -- an echo of Anwar's own agenda.

Anwar, who Mahathir had once anointed his political heir, is barred from politics until 2008 due to an earlier conviction on corruption. He served out that sentence last year and now wants to go Germany for a specialist spinal surgery.

Analysts said the court decision would cement the prime minister's hold in the crucial rural Malay heartland.

"Anwar was a popular figure and the fact that he was behind bars didn't go well with large sections of society," said Rejeev Malik, economist at JP Morgan Chase. "And now that the court has let him go during Badawi's prime ministership, that would boost his ratings."

The stock market rose nearly two percent after news of the ruling, which analysts said would go down well with foreign investors who were shocked in 1999 when Anwar was jailed amid criticism of the Malaysian judiciary.

It was "gratifying to see that justice has now been served," the US embassy said in a statement.

"Finally justice has been done," said Param Cumaraswamy, vice-president of the International Commission of Jurists, a watchdog for judicial independence.

"This is the judiciary's finest hour," added Christopher Fernando, one of Anwar's lawyers.

Anwar's wife, Wan Azizah Wan Ismail, said he wanted to fly to Munich as early as yesterday "if we can get his passport and get a flight".

"It's like a healing process to our family and the nation because my husband is now free," said Wan Azizah.

The three appeal judges delivered a majority judgement, with two finding that the evidence used to convict Anwar of sodomising his family's former driver could not be relied upon.

"We don't think it is safe to convict based on his evidence alone," Judge Abdul Hamid ruled, referring to the driver's testimony. "We are not prepared to uphold the conviction."

The ruling came on the sixth anniversary of Anwar's sacking by Mahathir, who ruled for 22 years until he stepped down in October last year. Mahathir's office made no immediate comment.

"I'm ready to work with all opposition parties for reform," Anwar told reporters in the court before being wheeled outside to embrace some of his jubilant supporters.

"I remain committed to my struggle for justice," he added. His wife and six children were also at the court.

Anwar had been in jail since April 1999 when he was sentenced to six years for corruption. With two years off for good behaviour, he ended that sentence in 2003 and was serving out the nine years he received in 2000 for sodomy when Thursday's ruling set him free.

A five-year ban on his involvement in active politics, such as standing for election, would apply from 2003, when his corruption sentence ended, his lawyers say.