US Secretary of State Colin Powell told reporters that it was on that basis that the US had decided to let the vessel carrying 15 Scud missiles and warheads to proceed to Yemen.
The vessel and its crew were detained for two days, after being intercepted by Spanish warships in the Arabian Sea.
The White House spokesman, Ari Fleischer, said the US would still seek to find out why the missiles had been hidden beneath a cargo of cement and why the So San freighter was not flying a flag of identification.
A BBC correspondent says Washington's decision to release the ship may be an indication of its desire to keep reasonable relations with a country it has been cultivating as a regional ally in its war on terrorism.
US concerns
Mr Fleischer said the So San was released after high-level discussions between Mr Powell and senior Yemeni Government figures.
Mr Fleischer told a news briefing in Washington that American concerns that the cargo was being taken to a "potential terrorist nation" had proved unfounded. He did not specify which nation he was referring to.
He added that there was no provision under international law which allowed the impounding of such a cargo.
"While there is authority to stop and search, in this instance there is no authority to seize a shipment of Scud missiles from North Korea to Yemen and therefore the merchant vessel is being released," he said.
'Defensive weapons'
The diplomatic incident began when the Spanish Navy intercepted and boarded the So San in the Arabian Sea about 960 kilometres (600 miles) east of the Horn of Africa on Monday.
US intelligence had been tracking the So San closely before it was stopped and boarded.
The missiles and warheads, along with a quantity of chemicals, were found hidden under a cargo of cement, and the ship was placed under the control of the US Navy.
The Yemeni Government said the shipment was destined for its
army.
The official Yemeni news agency, Saba, quoted Foreign Minister Abubakr
al-Qirbi as saying: "The shipment is part of contracts signed some time ago.
"It belongs to the Yemeni Government and its army and is meant for
defensive purposes."
'Axis of evil'
Although Yemen was accused by the US of "harbouring terrorists" in the wake of the 11 September attacks on America, its government has co-operated in the war against terror.
However, there have been fears that military hardware delivered to the country could fall into the hands of radical Islamic groups operating there.
US is also deeply concerned about North Korea's ballistic missile and nuclear programmes, which it regards as a threat to world peace.
North Korea, which has admitted having a nuclear weapons programme, has been described by President George W Bush as being part of an "axis of evil" which includes Iraq and Iran.
Washington imposed sanctions on North Korea after it supplied Yemen with Scud missiles in 1999-2000, in a deal which Yemen vigorously defended at the time.
Related to this story:
Scud affair clouds US-Yemen ties
(11 Dec 02 | Americas)
West's caution over North Korea
(11 Dec 02 | Asia-Pacific)
N Korea's Scud missiles
(11 Dec 02 | Asia-Pacific)
Legal maze over Scud seizure
(11 Dec 02 | Middle East)
South Korea cautious over missile seizure
(11 Dec 02 | Asia-Pacific)
SAS 'hunting Bin Laden in Yemen'
(17 Nov 02 | Middle East)