Pair convicted in 2014 after sending text message insulting Muhammad.
Prosecutor Chaudhry Ghulam Mustafa also told AFP the pair had been acquitted.
Blasphemy is a sensitive issue in Pakistan, where anyone deemed to have insulted Islam can face the death penalty and the whiff of even unproven allegations can lead to mob lynchings and vigilante murders.
Rights campaigners say accusations are often made to settle personal disputes.
Kausar and Emmanuel were convicted following a complaint by a shopkeeper who claimed to have seen the text message.
Amnesty International said: “Today’s decision puts an end to the seven-year long ordeal of a couple who should not have been convicted nor faced a death sentence in the first place. ‘Blasphemy’ cases are often premised on flimsy evidence in environments that make fair trials impossible, underscoring the significance of this verdict. The authorities must now immediately provide Shafqat, Shagufta, their family and their lawyer Saiful ul-Malook with adequate security.”
In April, the European parliament voted through a motion condemning Pakistan for failing to protect religious minorities, including Ahmadis, Shiites, Hindus, Christians and Sikhs.