Friday's landmark ruling comes after months of hearings in a case instigated by the "Panama Papers" leaks, related to alleged corruption during his previous two terms in office.
A five-member bench of the Supreme Court announced the verdict to a packed courtroom in the Pakistani capital, Islamabad.
Sharif's ouster means that his ruling Pakistan Muslim League-Nawaz (PML-N) party, which holds a comfortable majority in parliament, will have to nominate a new leader of the government in his absence, Aljazeera reported.
The government could also call snap polls, although a general election is due by early August next year
The 67-year-old becomes the latest Pakistani prime minister not to have completed a five-year term in office, many having been ousted in coups by the country's powerful military, which has ruled the country for roughly half of its 69-year-history.
Sharif and three of his children have been referred to a National Accountability court, which has been ordered to register corruption cases against them within six weeks, the judges said.
Security was tight outside the Supreme Court on Friday, with scores of riot police and paramilitary personnel deployed to secure the building.
Speaking ahead of the verdict, Siraj-ul-Haq, the leader of the opposition Jamaat-e-Islami party and one of the plaintiffs in the case, said he hoped the decision would help strengthen rule of law in the country.
"From the start, I have been supporting the view that … true accountability is necessary for true democracy," he told reporters outside the courtroom. "The law seems to not have been applied to the rich, but only to the poor."
The case against Sharif has also been championed by cricketer-turned-politician Imran Khan's Pakistan Tehreek-e-Insaf (PTI) party.
"After today's verdict, the responsibility for which direction we take lies with the parliament ... We believe that at this delicate moment, all patriotic Pakistani political parties need to unite," said Naeem-ul-Haque, a spokesman for Khan.
Sharif's supporters, meanwhile, had been defiant ahead of the announcement.
"The PML-N will fight every crisis, attack and conspiracy with wisdom, courage, integrity and honor," said Khawaja Saad Rafique, the federal railways minister.