The Nobel Peace Prize laureate, who has been detained for 15 of the past 21 years, was greeted by jubilant crowds who had gathered in Rangoon in anticipation of her release.
Prime Minister David Cameron and former Prime Minister Gordon Brown both welcomed the end to her detention.
Mr Cameron said: "This is long overdue. Aung San Suu Kyi is an inspiration for all of us who believe in freedom of speech, democracy and human rights," he said.
"Her detention was a travesty, designed only to silence the voice of the Burmese people. Freedom is Aung San Suu Kyi's right. The Burmese regime must now uphold it."
Mr Brown said: "There will be joy round the world at the release of Aung San Suu Kyi, the world's most renowned and courageous prisoner of conscience."
Mr Brown added: "Her release proves that no injustice can last forever, and while Burma's junta can continue its policy of repression it has never been able to wholly silence her voice.
"Despite enduring two decades of separation, her family has displayed great strength which has proved an inspiration to us all.
"Her release from house arrest - where she has spent 15 of the last 21 years - is only a partial victory, because her liberation and that of the Burmese people will not be complete until she is able to take up her position as the rightful leader of her country.
"Support from people of good conscience everywhere must continue as she fights for the freedom of her people."
Campaigners, who lined the streets ahead of the release, had also gathered at the headquarters of her party, the National League for Democracy (NLD), in a show of solidarity.
There had been an increased police presence in the area, fuelling speculation that her time in detention was nearing an end.
Foreign Secretary William Hague said: "Daw Aung San Suu Kyi's arbitrary detention for most of the last 20 years has been deeply unjust.
"Her fortitude in the face of this outrage has been inspirational. I welcome news of her release.
"She must now be allowed to assume a role of her choosing in the political life of her country without further hindrance or restriction.
"Last week's sham elections will not bring peace and prosperity to Burma. The regime now needs to release the other 2,100 political prisoners and begin a genuine dialogue with Aung San Suu Kyi and all opposition and ethnic groups.
"These remain the crucial first steps to solving Burma's many problems and addressing the pressing needs of its people."
Yvette Cooper, shadow foreign secretary, said it was "fantastic news" and described her as a "symbol of hope".
She added: "This is a significant step, but I hope only the first step.
"The world must keep up the campaign to support Aung San Suu Kyi and for the release of thousands of other political prisoners in a journey towards a free and democratic Burma."
Amnesty International's secretary general, Salil Shetty, said: "While Aung San Suu Kyi's release is certainly welcome, it only marks the end of an unfair sentence that was illegally extended, and is by no means a concession on the part of the authorities.
"The fact remains that authorities should never have arrested her or the many other prisoners of conscience in Burma in the first place, locking them out of the political process."
Mr Shetty said it was now important the authorities ensured her security and "put an end to the ongoing injustice of political imprisonment in the country".
There are more than 2,200 political prisoners in Burma still held under vague laws frequently used to criminalise peaceful political dissent, according to human rights campaigners.
Zoya Phan, international co-ordinator at Burma Campaign UK, said: "The release of Aung San Suu Kyi is about public relations, not democratic reform.
"I am thrilled to see our democracy leader free at last, but the release is not part of any political process, instead it is designed to get positive publicity for the dictatorship after the blatant rigging of elections on November 7.
"We must not forget the thousands of other political prisoners still suffering in Burma's jails."
Ms Suu Kyi, whose latest period of detention spanned seven and a half years, smiled broadly as she appeared at the gate of her compound.
Supporters had been waiting most of the day to see the 65-year-old, who walked out in a traditional jacket and a garland fixed in her hair.
Her release comes a week after the country's first elections in 20 years, which handed victory to the pro-military party but were condemned as a sham by critics.
She had been due for release last year but was convicted for violating the terms of her previous detention by briefly sheltering an American man who swam uninvited across a lake to her home.
Ms Suu Kyi, who has two sons, raised the pair in England where she lived with her late husband, British scholar Michael Aris, who died of prostate cancer in 1999 at the age of 53.
Her younger son Kim, 33, who still lives in the UK and has not seen his mother in 10 years, was among those awaiting her release in Bangkok, Thailand. Her eldest son is understood to live in the US.
Ms Suu Kyi took up the democracy struggle in 1988 and was thrust into a leadership role primarily because she was the daughter of martyred independence leader General Aung San.
She was awarded the Nobel Peace Prize in 1990, having been detained on national security charges and put under house arrest the previous year.
She was released in 1995 but has spent much of the time since then in detention, either in jail or under house arrest.
US President Barack Obama hailed the release of "a hero of mine" but called on the government to release "all political prisoners, not just one".
He said: "While the Burmese regime has gone to extraordinary lengths to isolate and silence Aung San Suu Kyi, she has continued her brave fight for democracy, peace, and change in Burma.
"She is a hero of mine and a source of inspiration for all who work to advance basic human rights in Burma and around the world. The United States welcomes her long overdue release.
"Whether Aung San Suu Kyi is living in the prison of her house, or the prison of her country, does not change the fact that she, and the political opposition she represents, has been systematically silenced, incarcerated, and deprived of any opportunity to engage in political processes that could change Burma."
Deputy Prime Minister, Nick Clegg, said he was "delighted" by today's developments but termed Ms Suu Kyi's prolonged detention "a disgrace".
"The Burmese regime should now leave her in peace and allow her to exercise her freedom fully," he said.
"Welcome as this news is, we should not allow it to hide the fact that the Burmese regime still has an appalling human rights record and has just overseen sham elections designed solely to keep the military in power."
Well-wishers sang the national anthem as Ms Suu Kyi emerged from her home.
In a brief address to supporters in Burmese, she said they would see each other again at her party headquarters on Sunday.
"If we work in unity, we will achieve our goal. We have a lot of things to do," she told the crowds.
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