The 29-year-old American military analyst, born Bradley Manning, will be freed on May 17 instead of her scheduled 2045 release, the White House announced.
She was sentenced to 35 years in 2013 for her role in leaking diplomatic cables to the anti-secrecy group. The leak was one of the largest breaches of classified material in US history.
While commuting the sentence, President Obama overruled his Secretary of Defense Ashton Carter's objections and immediately touched off a controversy in the closing days of the Obama administration, US media reported.
Manning has been lodged in prison after being convicted in August 2013. She also attempted suicide twice last year.
According to the White House, Manning's offences included one specification of wrongful and wanton publication to the internet intelligence belonging to the US, five specifications of stealing, purloining or knowingly converting US government records.
Manning also passed on sensitive messages between US diplomats, intelligence assessments of Guantanamo detainees being held without trial and military records from the wars in Iraq and Afghanistan.
The New York Times said the commutation also relieved the Department of Defence of the difficult responsibility of her incarceration as she pushes for treatment for her gender dysphoria, including sex reassignment surgery, that the military has no experience of providing.
Earlier in the day, the White House ruled out a similar commutation to Edward Snowden, who is currently on a political asylum in Russia.
"Mr Snowden should return to the US and face the serious crimes that with which he's been charged. He will of course be afforded the kind of due process that's available to every American citizen who's going through the criminal justice process," White House Press Secretary Josh Earnest said.
While responding to a question about Manning, Earnest said, "However, Chelsea Manning is somebody who went through the military criminal justice process, was exposed to due process, was found guilty, was sentenced for her crimes, and she acknowledged wrongdoing".
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