The Schleswig-Holstein court said he could still face corruption charges in Spain, and it has only suspended extradition - not ruled it out.
He had been living there after being charged by Spanish authorities with rebellion and misuse of public funds in last year's Catalan independence referendum, which the Spanish central government deems to have been illegal. It set bail at €75,000 (US$91,710).
It was not immediately clear when Puigdemont would leave the prison in Neumuenster where he has been held since his arrest on March 25.
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Four months later, the court suspended the sentence and ordered the actor not to leave the country without formal permission. The Chief Judicial Magistrate, Dev Kumar Khatri, while announcing the verdict, called the actor a "habitual offender".
Puigdemont's German lawyer said the separatist politician was arranging the transfer of the bail money to Germany.
The court, in Berlin, said the rebellion charge Puigdemont faced in Spain was not a criminal offence in Germany, while the violence component that would justify a high treason charge was also missing.
The former Catalan leader's German defense team welcomed the court's decision to dismiss the Spanish government's "outrageous" rebellion charge, adding that the case had a "trend-setting significance for the European understanding of democracy".
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First, in right-to-work states, teachers lack codified procedures for grieving issues like low pay. Repeal of the hotel tax reduces the total package by about $45 million.
The official, who spoke on customary condition of anonymity, said "Spanish justice will adopt the appropriate measures in the face of these new circumstances". "There is a risk of flight", the court said in its explanation.
Puigdemont has written an open letter from prison, urging Catalonia's parliament to make another attempt to elect jailed separatist activist Jordi Sànchez as the region's president.
In an indictment Thursday, Spanish National Court Judge Carmen Lamela says former Mossos d'Esquadra chief Josep Lluis Trapero was part of an organized plan to seek Catalonia's secession from Spain. But he then came under severe pressure when Spanish national authorities asked his regional police force to help prevent the October 1 referendum, which triggered Spain's worst political crisis in decades.
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On Tuesday both leaders vowed to deepen their ties on strategic and security issues. The Akkuyu plant is being built by Russia's nuclear energy agency, Rosatom.