Najib, prime minister from 2009 to 2018, was found guilty of corruption in relation to the embezzlement of billions of dollars tied to 1Malaysia Development Berhad, a state investment fund he co-founded while in power.
He has consistently denied wrongdoing.
"King Sultan Ibrahim has consented to grant a conditional pardon to Najib Razak, allowing him to serve the remainder of his sentence under house arrest until August 23, 2028," the prime minister's legal department said on Friday.
In the 1MDB scandal, more than $US1 billion ($A1.4 billion) allegedly made its way into accounts linked to Najib, 73, who says he has been made the scapegoat for a complex, globe-spanning scheme that siphoned away as much as $US4.5 billion in funds, according to US investigators.
It was the second pardon for Najib, who under the previous king in 2024 had his 12-year sentence halved and the fines imposed on him reduced.
Najib had insisted that the decision also allowed him to serve out his term under house arrest, but a legal effort to secure that was unsuccessful.
Najib was also convicted in a separate 1MDB-related case in December last year, for which he was sentenced to 15 years in prison and fined $US2.8 billion for abuse of power and money laundering.
He has lodged an appeal in that case.
Despite being jailed, Najib is a divisive figure in Malaysian politics and is still influential in the once-dominant United Malays National Organisation, which is part of Prime Minister Anwar Ibrahim's multi-party government.
Anwar's Pakatan Harapan alliance has opposed leniency towards Najib and the pardon could widen fissures in his administration.
Though the next election is not due until early 2028, Anwar has said he might consider calling a snap poll if the rifts deepen.
Pakatan teamed up with rival UMNO to form a government in 2022 when a general election left Malaysia with a hung parliament, but relations are now testy following a series of internal disagreements, including on the treatment of Najib.
Anwar's public support has taken a hit and it is unclear how his coalition would fare if an early election was called.
Najib was also fined 50 million ringgit ($A17 million) as a condition of his house arrest.
It was not immediately clear when he would leave prison and his legal team did not immediately respond to a request for comment.
