The Islamabad High Court made the decision after the Sharifs petitioned to appeal their sentences, handed down by an anti-graft tribunal earlier this year in a corruption case against them.
The development is the latest twist in a series of scandals involving the former prime minister, beginning with his ouster from office last year to several corruption cases and trials that he faces. When the anti-graft tribunal first convicted and sentenced Sharif on July 6, he was in London with his daughter, visiting his critically ill wife. The father and daughter returned home a week later and were taken to prison to serve their sentences.
Sharif's party, the ex-ruling Pakistan Muslim League, meanwhile, lost in parliamentary elections later in July and has now taken on the mantle of the opposition to new Prime Minister Imran Khan's government.
In Wednesday's decision, the two-judge panel headed by Justice Athar Minallah also ordered that Sharif, his daughter Maryam Nawaz and son-in-law Mohammad Safdar, be released once they each post a bond of half a million rupees, or about $4,000.
The prosecutors in the case, the National Accountability Bureau, said they would appeal Wednesday's ruling and take the case against Sharif to the country's Supreme Court.
Following the decision on Sharif, his supporters rushed to the court in jubilation, chanting pro-Sharif slogans, waving banners and posters of the ex-premier.
"This is a triumph of justice," said Sharif ally and former Foreign Minister Khawaja Asif who was outside the court.
Another supporter in the crowd, Naveed Abbasi, said he is convinced Sharif was a victim of conspiracy but that, " God willing, the people will make Nawaz Sharif again the prime minister ... for a record fourth time."
Amjad Pervez, a defense lawyer, said the required bonds have already been posted and that Sharif, his daughter and son-in-law would imminently be released from Adiala prison in the nearby garrison city of Rawalpindi, where they have been serving 10-year, seven-year and one-year prison sentences, respectively.
Sharif was temporarily released earlier this month to attend the funeral of his wife, Kulsoom Nawaz, who died at a London hospital after a long battle with cancer.
In July 2017, the Pakistani Supreme Court disqualified Sharif from office over corruption allegations. He faced several court cases at home and was later convicted of concealing assets abroad. The charges stemmed from the so-called leaked papers from a Panama law firm. Sharif faced two more cases before the anti-graft tribunal and has been banned for life from public office.
Reacting to Wednesday's decision, Senator Javed Faisal, a close aide of Prime Minister Khan, pointed out that the court only suspended Sharif's sentence and those of his family members, and did not acquit them.
"Their supporters should not celebrate so much as they will likely have to go again to Adiala prison," Faisal said.
However, analysts see the decision as a definite boost for Sharif's party and supporters.
"If the court finally quashes Sharif's conviction, that will be a cause of concern for the new government," said Tauseef Ahmed, adding that "Sharif is still a popular leader and has the capability to mobilize masses."
Ahsan Iqbal, Sharif party lawmaker and former interior minister, said the anti-graft tribunal had convicted Sharif, his daughter and son in-law without any legal grounds, but "based on a vendetta."
Sharif never completed any of his three terms as prime minister. His first government was dismissed by the then-President Ghulam Ishaq Khan in 1993 on corruption charges and his second government was toppled by Gen. Pervez Musharraf in a bloodless coup in October 1999.