"The Kenyan Supreme Court's nullification of the country's August election has significantly increased the likelihood of a violent crisis in East Africa's largest economy", says John Ashbourne, Africa economist at Capital Economics.
It is the first time in Kenya's history an election result has been cancelled.
On Friday, Marietje Schaake, the head of the EU Observer Mission, said the court ruling represented "a historic day for Kenya and we have always said that people who feel aggrieved should seek the path of the courts". Last year, Gabon's president, Ali Bongo, narrowly won another term in an election whose validity was questioned by worldwide observers, extending his family's 50-year rule. In 2013, the Supreme Court dismissed his petition.
The ruling on Friday (Friday night NZ Time), broadcast to a stunned nation on national television, sets up a new race for the presidency between Kenyatta, 55, and veteran opponent Raila Odinga, 72. Kenyatta, the son of the first president, is a Kikuyu and his deputy is a Kalenjin.
Last month's election results sparked protests and sporadic violence that killed at least 28 people.
"We were promised a digital election". The court ruling did not attribute any blame to President Kenyatta's party or campaign.
Announcing the decision, Chief Justice David Maraga argued that the election had "not been conducted in accordance with the constitution... A lot of them actually belong in jail and therefore we are going to ask prosecution for all the electoral commission officials who have committed this monstrous crime against the people of Kenya".
Days after the election, Kenyatta was declared the victor with 54% of the vote, which led to protests and clashes with the police, resulting in 24 deaths.
Worldwide election observers said at the time that they had seen no interference with the August poll, which saw Kenyatta win a second term with 54% of the vote. "Majority actually belong to jail and therefore we are going to ask for their prosecution", Mr. Odinga said.
Odinga called for the election commission to be disbanded.
Odinga's lawyer, however, had alleged that some 5 million votes were marred by discrepancies and said that the forms used to record results lacked key security features such as watermarks and the necessary stamps and signatures. "Kenya just had a hard and controversial election, and this decision pushes it right back into another electoral campaign, which will start nearly immediately".