A judge in Texas ruled that Mr Posada, now a Venezuelan national, should be freed pending an immigration hearing.
Mr Posada, 79, has been detained in the US since May 2005 after illegally entering the country.
A former CIA employee, he is wanted in Venezuela and Cuba over the downing of a Cuban airliner in 1976.
Federal prosecutors have asked that Mr Posada remain behind bars while they appeal against the ruling.
Mr Posada is accused of masterminding the 1976 bombing of a Cuban airliner in which 73 people died. He denies any involvement.
He was also jailed in Panama over a plot to assassinate President Fidel Castro during a visit by the Cuban leader to Panama in 2000, but freed in 2004.
Both Venezuela and Cuba want to put Mr Posada on trial.
US authorities have ruled out returning him to either of these countries, but they also do not want to let him go free, calling him a security risk, and so have been seeking a third country to take him.
His hearing, on charges of lying to immigration officials, is expected to take place in May.
The judge in the El Paso federal court ordered his release on $350,000 (£180,000) bail and on the basis that he remain in his Miami home and submit to electronic monitoring.
But immigration officials then said that an outstanding detention order against Mr Posada meant that he would be likely to remain behind bars.