Lim Guan Eng, the leader of the youth wing of the Democratic Action Party, was serving two concurrent 18-month sentences, but was released on good behaviour.
His political allies hope his release will galvanise a disparate opposition in forthcoming elections.
National symbols
Mr Lim was released from Kajang prison outside the capital Kuala Lumpur shortly after daybreak.
Several hundred activists from Malaysia's four main opposition parties gathered outside the prison, waving flags, party banners and balloons, and shouting "reformasi" (reform), the slogan of the jailed former Finance Minister Anwar Ibrahim.
Lim and Anwar have become national symbols of the growing opposition to Prime Minister Mahathir Mohamad's 18-year rule.
Lim Guan Eng was convicted in 1997 for publishing in 1995 a pamphlet, entitled "Ceramah Kisah Benar" (The True Story), which criticised the government's handling of allegations of statutory rape against a senior politician who was never prosecuted.
The politician denies any relationship with the girl.
Mr Lim's conviction was condemned by rights groups and opposition leaders.
Although Mr Lim is now free, he is barred from running for public office for five years from his release.
London-based Amnesty International called the charges against him "politically motivated, designed to intimidate dissenting voices".
The four main opposition parties, divided by ideology, see Mr Lim and Mr Anwar as unifying symbols in general elections which must be held by June next year but are expected before the end of this year.
Leaders of the four main opposition parties - DAP, Parti Keadilan Nasional (National Justice Party) led by Mr Anwar's wife Wan Azizah Wan Ismail, the Islamic fundamentalist Parti Islam se-Malaysia (PAS) and Parti Rakyat Malaysia - are planning a joint rally later on Wednesday, with Lim Guan Eng as the main speaker.
Lim Guan Eng recently described himself as "a Chinese MP going to jail for helping a Malay victim" and accused the coalition government of Dr Mahathir of failing to stand up to women's rights.
Country profiles
Mahathir keeps voters guessing
(18 Jun 99 | Asia-Pacific)
Mahathir's 'iron fist rule'
(30 Apr 99 | Asia-Pacific)
Malaysia's big trial: Special report
(14 Apr 99 | Malaysia crisis)
Mahathir wins Sabah election
(13 Mar 99 | Asia-Pacific)
Democratic Action Party
Office of the Malaysian Prime Minister
Amnesty International
Anwar Online
The BBC is not responsible for the content of external internet sites.
Indonesia rules out Aceh independence
DiCaprio film trial begins
Millennium sect heads for the hills
Uzbekistan voices security concerns
Chinese imports boost US trade gap
(From Business)
ICRC visits twelve Burmese jails
Falintil guerillas challenge East Timor peackeepers
Malaysian candidates named
North Korea expels US 'spy'
Holbrooke to arrive in Indonesia
China warns US over Falun Gong
Thais hand back Cambodian antiques