Abdullah met Abdul Ahad Jan on Tuesday and ordered the police to drop the case against the officer, which could have seen him jailed for at least three years.
Jan, who relatives said was upset by a wave of killings of protestors by security forces, was overpowered by Abdullah's bodyguards after throwing the shoe, which missed its target. He also waved a black flag, a symbol of Kashmiri protest, and chanted "We want freedom."
"Omar called Jan to his residence and gave him a patient hearing after which he directed the police authorities to release him immediately," said the statement, released on Tuesday.
The Muslim-majority Kashmir Valley, where separatists have fought for 20 years for independence from Hindu-majority India, has witnessed its worst violence in more than two years over the last few months.
Nearly 60 protesters opposed to Indian rule and bystanders have been killed, most of them young men or teenagers shot by police.
Abdullah has come under pressure for his handling of the recent unrest, with many residents blaming him for what they see as the disproportionate police response to the protests.
Several thousand people were reported to have descended on Jan's home village of Ajas, about 40 kilometres (25 miles) north of Srinagar, after the show-throwing incident on Sunday.
Witnesses said women showered flowers on Jan's wife, Bega Jan, and kissed and hugged her, while others beat drums outside her home and the crowd chanted "Long live Ahad Jan."
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