(Adds U.S. State Department reaction, paragraph 10)

By Kamran Haider

ISLAMABAD, July 20 (Reuters) - Pakistan's Supreme Court reinstated the country's top judge on Friday in an historic ruling that dealt a blow to President Pervez Musharraf, who had suspended him four months earlier.

Chief Justice Iftikhar Chaudhry became a symbol of resistance to General Musharraf after refusing to quit in the face of pressure from the president and his intelligence chiefs, and was lionised by supporters in rallies round the country.

"The reference has been set aside and the chief justice has been reinstated," Justice Khalil-ur-Rehman Ramday, the head of the 13-member bench, said at the end of the two-month-old case.

The decision to reinstate Chaudhry was unanimous, but the decision to quash the charges against him was carried by a 10-3 majority.

Mobbed by wellwishers following his victory, Chaudhry simply said: "Thank you. Pray for me."

Chaudhry's defiance created the greatest challenge to Musharraf since he came to power in a coup eight years ago, and his reinstatement could create problems for Musharraf's plans for re-election for a second five-year term in the coming months.

The setback for Musharraf comes at a time of heightened violence after a deadly army operation to crush a militant stronghold at Islamabad's Red Mosque earlier this month.

More than 180 people have been killed in a series of suicide attacks and shootings by Islamist militants, and on Tuesday a suicide bomber killed 17 people outside an Islamabad courthouse where Chaudhry had been due to speak to supporters.

LAWYERS CHEER VERDICT

Pakistan has been ruled by generals for more than half the 60 years since its formation after the partition of India in 1947, and it is the first time that the judiciary has given a ruling against a military ruler.

"It speaks positively to the political situation in Pakistan that these kinds of issues can be resolved through the established institutions, through the rule of law," U.S. State Department deputy spokesman Tom Casey told a news briefing.

Lawyers in court applauded as the decision was read, while shouts of "Go, Musharraf, Go" resounded among the throng of supporters for the chief justice gathered outside.

In the eastern city of Lahore, around 1,000 lawyers knelt in thanks in front of the High Court.

Musharraf's move against the judge sparked a nationwide lawyers' movement to defend the judiciary's independence and handed opposition parties a hot issue in an election year.

Many pro-Chaudhry protests turned violent.

The country's top court has been regarded as compliant ever since a ruling in the late 1950s which coined the phrase "doctrine of necessity" to justify the first military takeover.

Munir A. Malik, president of the Supreme Court Bar Association and a member of Chaudhry's legal team, described it as a "historic decision" and proved that the "judiciary is independent in Pakistan".

Former prime minister Benazir Bhutto, who hopes to return from self-exile for elections under a possible deal, said in London that the ruling could calm down Pakistan's political scene.

VARIED CHARGES

The mish-mash of misconduct charges against Chaudhry included using influence to get his son a job, fiddling petrol expenses and that he had a penchant for expensive cars.

The government filed a statement in the court last month in which it also accused Chaudhry of harassing judges, showing bias in appointments and intimidating police and civil servants.

Musharraf's real motive for trying to get rid of Chaudhry, many critics suspect, was that the judge could allow constitutional challenges to his plans to get re-elected by current assemblies before they are dissolved for a general election at the end of the year.

Opposition parties may also challenge Musharraf's right to stand for a second term while still army chief, a post he is constitutionally obliged to give up by the end of the year.

Musharraf had earlier said he would accept whatever decision the court reached regarding Chaudhry.

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