Mohammed Ali Hamadi arrived in Beirut four days ago on a commercial flight from Germany, a Lebanese security official and a Hezbollah guerrilla group said on condition of anonymity because they were not authorized to speak to the media.
It was not known where Hamadi, who spent 19 years in prison, went after entering Lebanon.
Hamadi's case came up for a court-mandated review, and he was released after an expert assessment and a hearing, said Doris Moeller-Scheu, spokeswoman for the Frankfurt, Germany, prosecutor's office.
German Justice Ministry spokeswoman Eva Schmierer said Berlin had not received any request from the United States for Hamadi's extradition.
U.S. authorities had requested his extradition so he could stand trial in the United States, but the Germans, who have no death penalty, insisted on prosecuting Hamadi.
German Foreign Ministry spokesman Martin Jaeger said there was no connection between Hamadi's release and the recent freeing of former hostage Susanne Osthoff, a German woman released over the weekend after spending more than three weeks as a captive in Iraq.
TWA flight 847 from Athens, Greece, to Rome was hijacked in June 1985 to Beirut, where the hijackers beat and shot U.S. Navy diver Robert Dean Stethem, 23, of Waldorf, Md., and dumped his body on the tarmac.
Stethem was the only casualty during the hijacking ordeal, in which 39 Americans were held hostage for 17 days. He received the Bronze Star and Purple Heart decorations, and a U.S. Navy guided missile destroyer is named in his honor.
Hamadi was arrested at the Frankfurt airport on Jan. 13, 1987, when customs officials discovered liquid explosives in his luggage.