Mr Straw said that fresh evidence had come to light during a meeting with the Shields family on 28 August.
He was told that two members of the family had visited the home of another man alleged to be responsible for the crime, shortly after the attack in 2005.
"I was told in the course of the visit that the man made an oral confession in front of several other people," Mr Straw said.
"This episode, I was told, happened on 22 July 2005, a day after the start of Mr Shields' trial in Bulgaria.
"I will not set out in this statement all the evidence that has come to light over the last two weeks but suffice it to say that there is very good reason to believe I was being told the truth."
Mr Straw added: "I have now concluded, having looked carefully at all the evidence now available, that Michael Shields is telling the truth when he says he is innocent of the attempted murder of which he was convicted in Bulgaria.
"That being so I have recommended to Her Majesty the Queen that he should be granted a free pardon and she has graciously assented."