Engineer Robert Pether was granted conditional release after being detained on misrepresentation and fraud charges.
Mr Pether was arrested following a dispute with the Iraqi government and his employer, a consulting firm working on headquarters for the country's central bank.
He was sentenced in 2021 to five years in prison and fined millions of dollars.
A United Nations report on arbitrary detention detailed allegations that Mr Pether was subject to extreme cold, humiliation, threats of death and forms of psychological abuse, including being shown a torture room.
Foreign Minister Penny Wong welcomed Mr Pether's release.
"I know the personal toll Mr Pether's detention has taken on him and his family and hope this news brings a measure of relief after years of distress," she said in a statement.
"While Mr Pether remains subject to legal proceedings in Iraq, this is a positive development and follows persistent Australian government advocacy over many years.
"His case has been raised with Iraqi authorities over 200 times, including at the highest level by the prime minister and myself."
Mr Pether wrote a letter in 2024 expressing concern for his health.
Senator Wong said officials would continue to press the case for the Australian in Iraq.
"We will continue to support Mr Pether and his family and to advocate for Mr Pether's interests and wellbeing," she said.
"I want to thank Australian officials for their tireless work on Mr Pether's case, including Australia's special envoy who travelled to Iraq in recent weeks to negotiate for this outcome."
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