Sgt. Lawrence Hutchins III will remain free while a higher court decides whether to affirm or overturn the April ruling, which is being appealed by the Navy.
Monday's surprise decision marked a second major blow for the government's prosecution of U.S. troops accused of killing unarmed Iraqis. Hutchins was convicted of killing a 52-year-old Iraqi man who was dragged out of his home by the Marine's squad.
Hutchins' attorney, Capt. Babu Kaza, argued the married father of a 5-year-old girl is not a flight risk or a threat to society. Kaza said he and Hutchins, both Roman Catholics, prayed with a rosary at Monday's hearing before the judge announced his decision.
After being released, Hutchins packed his bags, then got a ride from Kaza to a Taco Bell for dinner.
"I'm going to be the best Marine I can be today," an elated Hutchins told The Associated Press in an exclusive phone interview following his release. "Today is really a surreal experience. I think we had a good judge. ... It's hard to describe exactly what I'm feeling. I'm happy."
Hutchins said he called his family immediately after the hearing to tell them he will see them soon. He was preparing to call his daughter, Kylie, next.
"I'm going to tell her she's my little princess, of course," Hutchins said.
Prosecutors could not be immediately reached for comment after the hearing Monday evening.
Attorneys for the government say Hutchins led a squad of seven troops who killed the man in the Iraqi village of Hamdania in 2006, and then planted a shovel and AK-47 to make it appear he was an insurgent.
The U.S. Navy-Marine Corps Court of Criminal Appeals in Washington ruled Hutchins was not given a fair trial because his lead attorney left the case shortly before his 2007 trial.
The case is now in the hands of the U.S. Court of Appeals for the Armed Forces, which can either affirm or overturn the Washington court's ruling.
Hutchins, 26, says he was not with his squad at the time. The others in his squad served less than 18 months.
Navy Secretary Ray Mabus told the Marine Corps Times last year that he believes Hutchins was the ringleader in the premeditated murder plot and attempted cover-up, and that he should complete the full sentence. Hutchins was initially sentenced to 14 years, but that was later reduced.
Hutchins said his squad told him they had killed an insurgent leader, and he did not learn of the mistake until after the investigation.
The U.S. Court of Appeals for the Armed Forces is expected to hear arguments from both sides this fall and could take until next year to make a decision.
If the court rules in his favor, Hutchins has said he wants to live with his parents in Plymouth, Massachusetts, and help them pay off their mortgage since they refinanced their home several times to cover his legal expenses. He hopes to work at the local sheriff's department, where his brother works.
Hutchins told a Naval Clemency and Parole Board in January he suffers from Post Traumatic Stress Disorder and would like to help others suffering from PTSD.
"I am forever diminished by the death and violence I witnessed in Iraq, and forever consumed with regret over what I brought about with my hands," Hutchins wrote to the board. "I do not find forgiveness as I lay in bed at night, nor would I accept it if it could somehow be offered. I am responsible for the loss of a human life on the night of April 26th, 2006."