The king commuted the sentences of Deborah Parry, 39, and Lucille McLauchlan, 32, and ordered them released, according to Ghazi Algosaibi, Saudi Arabia's ambassador to Britain.
Algosaibi said the king commuted the sentences to time served in response to a petition from the women's families. The nurses had been imprisoned since December 1996.
"The nurses have been released," said their Saudi lawyer, Salah al-Hejeilan, adding that they were with the British consul and would fly to Britain on Wednesday.
A Saudi court convicted Parry in August 1997 of stabbing Yvonne Gilford to death. McLauchlan was found guilty of being an accessory and sentenced in September to eight years in prison and 500 lashes. The lashing has not been carried out.
Gilford's body was found Dec. 11, 1996, in her dormitory at the King Fahd Medical Center in the eastern Saudi city of Dhahran, where the three nurses worked. She had been stabbed 13 times, beaten and suffocated.
Parry and McLauchlan initially confessed to the murder after their arrests, but later recanted, saying their confessions were obtained through physical and sexual abuse by their interrogators.
Parry escaped beheading when Gilford's brother, Frank Gilford, waived his right to demand the death penalty in exchange for a reported $1.2 million settlement. Although allowed by Saudi law, the deal angered some Britons.
The money has yet to be paid but Frank Gilford's lawyer, Michael Abbott, said he now expected it to be handed over immediately.
British Prime Minister Tony Blair, who brought up the nurses' imprisonment during a visit to Saudi Arabia in April, welcomed the clemency, describing it as a "generous humanitarian act."
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