Mr Smyth, 38, who was convicted of attempting to murder a prison officer, walked free amid jubilant scenes after friends raised dollars 1.5m ( pounds 781,000) bail using their homes as collateral.
A judge sitting in an Immigration Court released him despite claims by US prosecutors that he was highly dangerous and likely to flee. The decision will infuriate the British authorities who want him sent back to serve the rest of his 20-year sentence.
The British government is still angry about its lengthy and costly battle to extradite the IRA's Joseph Doherty, which ended with his return earlier this year.
Yesterday evening Mr Smyth's supporters were preparing a welcome-home party in the heart of San Francisco's Irish district where he has been living under a false name, working as a painter and decorator.
His American wife, Margaret Lynch, who recently discovered his true identity, said she was 'thrilled the American justice system worked', adding that her husband was innocent. He would resume his life and prepare to fight his case, she said.
Mr Smyth, who is from Belfast, was arrested in June after the American authorities discovered that he had obtained a passport under an assumed name. They later matched his fingerprints to those of IRA fugitives.
Although he admitted being a Maze escapee, he denied committing the attempted murder for which he was jailed. He escaped in 1983 along with 37 others in the biggest-ever breach of prison security. His lawyer is planning to travel to Northern Ireland to investigate his conviction.
Another Maze fugitive, Kevin Barry John Artt, who was convicted of murdering the prison's deputy governor, was also captured, near San Diego. Both men had adopted the identities of American twin brothers who died years ago, and were being held awaiting trial for passport offences and illegal entry. Mr Artt, 33, is in prison in Santa Rita, awaiting his bail hearing.
The decision to grant bail to Mr Smyth was a blow to federal prosecutors. William McGivern, an American attorney, said: 'He is a very dangerous person . . . He has broken out of prison and come to the United States and hidden for eight years. He is a convicted attempted murderer.'
Last month Mr Smyth was granted bail by a federal judge but this was overruled on appeal after the British government said it wanted to extradite him.
After his release Mr Smyth said that the Irish and Irish-American communities had 'hammered a nail into the coffin of British injustice in the north of Ireland'.