The decision came a day after the 2009-batch officer, whose suspension on questionable grounds had triggered nationwide outrage, met Chief Minister Akhilesh Yadav along with her husband Abhishek Singh, also an IAS officer.
While the state government has not cited any reason for the revocation so far, sources said it has not found any evidence of wrongdoing on Ms Nagpal's part.
The 28-year-old officer was suspended as the Sub-Divisional Magistrate of Gautam Buddh Nagar on July 27 for ordering the demolition of a mosque being built illegally on the government land in Greater Noida on the outskirts of Delhi - an act that may have led to communal disharmony in the area, the Akhilesh Yadav government claimed.
However, it is believed the state government took the action following her crackdown on the politically-connected sand mining mafia in the area.
In a controversial claim, the Samajwadi Party has said the IAS officer pleaded to be revoked in her meeting with Mr Yadav. "She came and apologized that it was her mistake; that she didn't come to him (Mr Yadav) and instead approached the media. The Chief Minister forgave her. If she had apologized earlier, this issue would not have prolonged," Samajwadi Party leader Ram Asrey Kushwaha said.
Last month, she had met the Chief Minister's father and Samajwadi Party chief Mulayam Singh Yadav to explain her stand to him. The meeting had triggered speculation that her suspension might soon be revoked.
Ms Nagpal's suspension had led to protests by IAS officers across the country. The outrage led to Congress president Sonia Gandhi writing to Prime Minister Manmohan Singh asking him to ensure she is not treated unfairly.