Prime Minister Scott Morrison said the Melbourne-based Bahraini refugee had been released on Monday afternoon in Bangkok.
"Hakeem Al-Araibi has left jail," Mr Morrison said in Canberra.
'"He is on his way to the airport, the next step is for him to return home."
An official from the Thai attorney general's office, Chatchom Akapin, said on Monday Bahrain had requested the case be dropped after it had sought his extradition.
Al-Araibi was wanted by Bahrain after fleeing the country when he was charged with vandalising a police station in 2012. He was sentenced to 10 years in jail in absentia.
The Thai Foreign Ministry later refused to give details of why Bahrain asked for the case to be dropped. However, Bahrain state media reported on Sunday that Prime Minister Khalifa bin Salman al-Khalifa spoke on the phone with Thai Prime Minister Prayut Chan-o-cha.
But after Al-Araibi's release on Monday, Bahrain's Foreign Ministry said in a statement the 10-year jail sentence remained in place and reaffirmed the country's right to "pursue all necessary legal actions against him".
Hakeem Al-Araibi en route to Australia
Mr Morrison thanked Thailand for releasing Al-Araibi after intense lobbying from the Australian government, global human rights groups, sporting bodies and the public.
"We greatly appreciate their listening to the issues that have been raised by our government and many others who have raised this case," Mr Morrison said.
Former Socceroo Craig Foster championed the push to free Hakeem Al-Araibi
Al-Araibi, 25, was detained at Bangkok airport on November 27 when he arrived in Thailand for his honeymoon with his wife.
The arrest was made after Bahrain issued an Interpol Red Notice for his detention on November 7. Australia came under fire for passing on the notice to Thai authorities before his arrival.
He had faced at least another two months in jail after a court in Bangkok last week set down his pre-trial extradition hearing for April 22.
The player's Australia lawyer Latifa Al-Haouli of Sabelberg Morcos Lawyers, told SBS News on Monday legal staff were working with Thailand’s department of corrections to secure Mr Al-Araibi's return to Australia.
“We won,” she said.
“They have to send him home as quickly as possible.”
Former Socceroo Craig Foster tweeted, "thanks go to the wonderful people of Thailand for your support and to Thai Government for upholding international law".
Al-Araibi fled Bahrain in 2014 and was granted refugee status by Australia where he plays soccer for semi-professional Melbourne club Pascoe Vale.
Football Federation Australia thanked Foster as well as the Australian and Thai governments.
"The football family looks forward to welcoming Hakeem home and providing him with ongoing support after such a difficult period," chairman Chris Nikou said.
Sayed Ahmed al-Wadaei from the London-based Bahrain Institute for Rights and Democracy said the decision was a huge victory for the human rights movement in Bahrain and the rest of the world.