Biljana Plavsic surrendered voluntarily to the tribunal in January
Judges ruled that 71-year-old Biljana Plavsic should be released as soon as possible and allowed to stay in Serbia until the trial begins early next year.
Mrs Plavsic is charged with genocide, crimes against humanity and war crimes for her role in the campaign of ethnic cleansing against Muslims and Croats in the 1992-95 war in Bosnia.
After former Yugoslav President Slobodan Milosevic, she is one of the most senior political figures in the custody of the International Criminal Tribunal for the former Yugoslavia (ICTY).
She surrendered to the tribunal in January and is the only woman in detention there.
Last minute bargaining
Prosecutors had indicated that they would not object to Mrs Plavsic's release if she remained in the Netherlands, but after some last minute bargaining between her lawyers and chief prosecutor Carla Del Ponte that position changed.
"There is no longer disagreement, the accused will be provisionally released to reside in the Republic of Serbia," said trial judge Richard May.
The court said it had made its decision after receiving assurances from Belgrade that Mrs Plavsic would return to The Hague and continue to co-operate with the tribunal.
Serbian Justice Minister Vladan Batic was present at the hearing to offer personal guarantees that Mrs Plavsic would return for her trial.
Positive influence
Mr Batic said that the decision to release Mrs Plavsic would have a "positive influence" on the tribunal's image in Serbia, where it is perceived to be biased against Serbs.
Mrs Plavsic will go on trial early next year alongside her wartime ally, Momcilo Krajisnik.
On Tuesday the same court rejected a request from Mr Krajisnik to be released for three days to attend a memorial service for his father.
It argued that the Bosnian authorities could not be trusted to assure his return.
Both Mrs Plavsic and Mr Krajisnik were close allies of former Bosnian Serb leader Radovan Karadzic who has been indicted for war crimes and is believed to be on the run in eastern Bosnia.