Judge Amal Ranarajah in the Trincomalee High Court in the east allowed the release of suspects on bail.
The killing of some five Tamil students in early 2006 by the police's elite special task force caused international concerns as rights group urged the Sri Lankan government to bring perpetrators to justice.
The parents of the students accused the government troops of gunning down five students.
Bowing to pressure, the government initiated the legal process which resulted in the arrest of the 12 personnel in August.
The suspects were released based on cash bail terms, the court announced, adding that they must report to police in the capital Colombo every week.
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