"The court rules that the forensic psychiatric care of Sture Bergwall shall continue and change from closed to open care," the administrative court in Falun said in a statement.
Sixty-three-year-old Bergwall, previously known as Thomas Quick, confessed to more than 20 murders. He was convicted of eight but the guilty verdicts were all quashed after he withdrew his detailed but at times contradictory confessions.
He was later cleared of all the murders due to lack of evidence, amid revelations that he had been heavily medicated at the time of the confessions.
The court ruling which ordered his release added that he still suffers from a "personality disorder" but not to the extent that he should be held in custody.
Bergwall spent 23 years at the secure psychiatric hospital in Säter in central Sweden.
On Wednesday at 10am, the National Board of Forensic Medicine (Rättsmedicinalverket) deemed that Bergwall could be set free as an outpatient, a decision supported by the hospital.
Bergwall said he now plans to head to Jämtland in northern Sweden.
"I have a lot to tell, and this is what I plan to spend my time doing when I leave Säter," the 63-year-old wrote on his blog on Wednesday.
Bergwall will have to abide by several conditions to remain an outpatient, including abstaining from alcohol and drugs, undergoing drug testing, and maintaining contact with the psychiatric board.
The convictions against Bergwall have been dubbed Sweden's greatest miscarriage of justice in recent times because of the swiftness with which he was found guilty of the eight murders, which occurred between 1976 and 1988.
During psychological counselling, following an armed robbery conviction, he confessed to all eight murders as well as more than 20 others in Sweden, Norway and Finland for which he was not tried.
He often described how he butchered his victims and how in at least one case he ate body parts.
In December 2008, however, he suddenly retracted all his confessions, saying he had been craving attention at the time and had been heavily medicated by doctors.
In July 2013 he was acquitted of the last murder charge.
A number of high-ranking opposition politicians and legal experts have called for an independent commission to examine how Swedish courts could have convicted Bergwall despite the lack of evidence.
Justice Minister Beatrice Ask announced a review in July 2013.