The court said that because Puigdemont can't extradited for rebellion he posed less of a flight risk and could be released on bail.
The court ordered Puigdemont's release on about $90,000 bail.
Spain accuses the Catalan separatist of rebellion and corruption after he organised an unsanctioned independence referendum. Proceedings to decide whether to grant extradition on corruption charges may continue, however.
Puigdemont was detained in Germany on a Spanish arrest warrant as he attempted to drive from Finland to Belgium on March 25.
It wasn't immediately clear when Puigdemont will be released. "It always respects them, whether it likes them or not", a government spokeswoman said.
Spain issued an extradition warrant against Puigdemont for rebellion and misuse of public funds after the ousted Catalan president fled the country in October.
The Spanish government said it respected the decision of the German court.
The German system is still studying Spain's extradition request. The statement also said that a comparable crime in the German law might be that of "high treason", but in that case it would not be suitable as it lacks the requirement of "violence".
Former Catalan separatist leader Carles Puigdemont has written an open letter from a German prison, urging Catalonia's parliament to make another attempt to elect jailed separatist activist Jordi Sanchez as the region's president.
Earlier Thursday, the Spanish National Court charged the former head of Catalonia's regional police and other regional security officials with sedition over their role in events leading to the banned referendum on independence. Puigdemont was imprisoned in Neumünster after being arrested at his entry to Germany through the border with Denmark, following an order given by the court of that city to keep him in prison and avoid his escape.
The former chief of Catalonia's regional police and other regional security officials have been charged with sedition over their role in events leading a year ago to a banned independence referendum.