Katsav, 71, did not speak to a crowd of journalists gathered outside the Maasiyahu prison near Tel Aviv as he left while surrounded by family.
He was convicted in December 2010 of two counts of rape, sexual harassment, indecent acts and obstruction of justice.
The Iran-born bureaucrat, who rose from impoverished origins as a child immigrant, resigned from the largely ceremonial role of president in June 2007 and became an outcast of the political establishment.
Katsav had been rejected twice by the parole board since he became eligible for the customary one-third reduction for good behaviour.
He had maintained his innocence, and his previous applications were turned down in part because he had expressed no remorse over his crimes and undergone no rehabilitative process.
Women's rights groups had especially criticised his refusal to acknowledge the facts that led to his conviction and to express regrets.
Israeli media reported, however, that the parole board in its latest decision, announced on Sunday, found that Katsav had more recently "undergone a change".
Israel's justice ministry announced today that prosecutors would not appeal the parole board's decision. They had been given a one-week deadline to do so.
Katsav will face restrictions on his movements including a ban on overseas travel and a requirement to be at home between 10:00 pm and 6:00 am.
The decision to free him has been criticised by a group of opposition lawmakers including the leader of the Meretz party, Zehava Galon.
"This is a dangerous message that you can attack women and get away with it with the least punishment provided you are well-connected," they said in a statement.
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