The decision was made about an hour after the start of the retrial of Fahmy and co-accused Egyptian cameraman Baher Mohammed, who was also released on bail.
The two have been in prison for more than a year on terror-related charges.
Fahmy, Australian Peter Greste and Mohammed were arrested while working for satellite news broadcaster Al-Jazeera English in December 2013. Greste was released Feb. 1 and has returned home.
Fahmy's fiancée, Marwa Omara, who is in Cairo for the retrial, cheered her husband's release, saying: "Long live justice."
The trial is now reportedly set to resume on Feb. 23.