Mr Jawad has been held in Guantanamo Bay since 2002
The Obama administration says it will release Mohammed Jawad, who has been held at the Guantanamo Bay prison camp since 2002.
Earlier this month officials admitted that there was no military case for Mr Jawad's continued detention.
But government lawyers had said they wished to keep him in detention pending a possible criminal prosecution.
The decision could set a precedent leading to the release of other Guantanamo inmates.
His lawyers say they are confident that Mr Jawad will be released and allowed to return to Afghanistan, but the US government still has three weeks to complete a separate criminal investigation before deciding his future.
Mr Jawad was arrested in Afghanistan in December 2002, after being accused of throwing a grenade at a jeep and injuring two US soldiers and their interpreter.
His lawyers say he was 12 years old at the time of his arrest, although Pentagon officials say a bone scan indicates that he was actually 17.
Shortly after his arrest, he was transported to the US detention facility at Guantanamo Bay, where he is still being held.
Charged in Afghanistan in December 2002 for allegedly attacking a US military jeep
Claims his confession was obtained using torture
US government's case against him described by a judge as "riddled with holes"
His lawyers campaigned for his release, arguing that his confession had been obtained by Afghan officials using torture.
In October 2008, a military judge ruled the confession inadmissible and on 16 July, Judge Huvelle described the US government's case against Mr Jawad as "an outrage" that was "riddled with holes".
On Friday US authorities said they no longer considered him to be a military prisoner.
But they also said that they intended to construct a criminal case against Mr Jawad, and that he should remain in detention while they did so.
"After seven years of injustice this was a victory for the rule of law," said Major Eric Montalvo, a lawyer for Mr Jawad.
"Finally we've turned the corner on Guantanamo," he told the BBC's Jonathan Beale in Washington.
Observers say the decision could mean that other Guantanamo detainees will also be released.
Shortly after entering the White House, US President Barack Obama pledged to close the prison at Guantanamo Bay.
Since making the pledge, administration officials have been reviewing the case files of Guantanamo detainees in an attempt to determine which prisoners should face criminal trials, which should face military commissions, which should be released and which can neither be tried nor released.
Mr Obama said he wanted the camp closed by January 2010.