Clarence Morris, 39, had telephoned his victim over 200 times, thrown women's underwear at her and threatened her with a claw hammer. He had previous convictions for rape, unlawful sexual intercourse and indecent assault.
Judge Peter Fingret said it was "regrettable" that the limitations of the Mental Health Act prevented him from sending Morris to a secure hospital where he could stay for an indefinite period.
His decision followed evidence from a psychiatrist who said that although Morris had a psychopathic disorder he was not suitable for treatment.
The judge sentenced Morris to 46 months in jail, but because he had spent 27 months in custody he was released yesterday to a secret address.
The outcome came as a disappointment to Victim Support which said: "This is not going to encourage people to come forward. Stalking is very distressing for victims and having to go to court and face the perpetrator is distressing as well."
Morris's victim, Perry Southall, 24, was in court yesterday to hear the verdict. In her evidence, she said her terror was so intense that she developed pains in her joints and abdomen, and would suddenly burst into tears.
She said: "Before Clarence Morris came on the scene, I was a confident, outgoing person. He has reduced me to a point where I find it hard to cope with everyday life." Ms Southall made no comment on the outcome as she left court.
But Anne Strahan of the Suzy Lamplugh Trust, which advises on how to deal with stalkers, said there was a loophole in the law: "While someone may not be normal by the standards of a normal person in the street, unless they have a treatable illness they cannot be sent to an institution."
Morris was originally sentenced to five years in 1997 but during a retrial, psychiatrist Dr Neil Boast told the court that although Morris posed a "high risk of future violence" he was not suitable for secure hospital treatment, under the terms of the Mental Health Act, and could be released as long as he continued to take medication.
Judge Fingret warned Morris that if he broke the conditions of his release by trying to see Ms Southall or failing to take his medication, he would be sent back to prison.
The court heard that Morris had a total of 39 previous convictions, most of them for violence and dishonesty and had spent 15 years in jail.