Judge Chaudhry Habib-ur-Rehman of the anti-terrorism court in Rawalpindi granted bail to Musharraf against two surety bonds of Rs 10 lakh each.
In the morning, the judge had reserved his decision after hearing arguments by lawyers of both sides. The judge announced his decision in the afternoon.
During the arguments, Musharraf's lawyer Salman Safdar said there was no solid evidence or witness against his client. He said Musharraf had not been blamed for the 2007 suicide attack that killed Bhutto by the family of any of the victims.
Prosecutor Chaudhry Azhar of the Federal Investigation Agency opposed Musharraf's bail petition, saying the former President could flee Pakistan if he was freed from detention.
Bhutto was killed by a suicide bomber after addressing an election rally in Rawalpindi in December 2007. Musharraf has been accused of providing inadequate security to Bhutto. 69-year-old Musharraf, who is currently being held at his farmhouse on the outskirts of Islamabad, was arrested shortly after he returned to Pakistan in March to lead his All Pakistan Muslim League party in the general election.
He was subsequently barred by a court from contesting polls for the rest of his life. Besides the Bhutto assassination case, Musharraf has been arrested for detaining dozens of judges during the 2007 emergency and for the killing of Baloch nationalist leader Akbar Bugti in a 2006 military operation.
Speculation is rife in Islamabad that Musharraf may be allowed to leave the country under a deal worked out by the powerful military.