Detectives said the boy, arrested at his home in Kirkdale, Liverpool, on Tuesday night, had been eliminated from the inquiry. James was abducted from a shopping centre in Bootle on Friday.
Local anger at the killing is so intense that the boy will not be returning to the house where he was arrested. For their safety, his family have gone to a secret address.
About 80 people gathered outside the house on Tuesday and there were jeers and shouts of 'murderer' as he was led, hidden by a blanket, into one of a convoy of eight police vans. Yesterday detectives appealed for calm.
His release came after that of two other youths being questioned as witnesses. They had been arrested after refusing toco-operate voluntarily.
Last night no one was in custody in connection with James's murder. Despite a massive public response, including several important new leads, police have so far not identified his two abductors.
James, two, from Northwood, Kirkby, was found dead with multiple injuries, on a railway embankment in Walton on Sunday. A security video at the shopping centre showed him being led away by two boys aged about 12 and 13.
Evidence emerged yesterday that two boys tried to lure away a child shortly before James was taken away. A mother found the youths talking to her son at the centre when he wandered off. She challenged them and they walked off. Last night the woman, who has not been named, said: 'I must be the luckiest mother alive.'
The woman police officer who has been comforting James's parents said last night that the family is in severe shock.
PC Mandy Waller met the boy's mother, Denise, when she reported him missing. She said: 'I think Mr Bulger has possibly accepted it more than Denise. She is totally shell-shocked. I don't know how they are going to cope with it at all. They have obviously been through a very bad time . . . and it isn't going to get any better over the next few weeks.'
She said Mrs Bulger did not appear to blame herself for James's abduction, which happened in seconds while she was in a shop.
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