"The government is ordered to release JuD chief Hafiz Saeed if he is not wanted in any other case", said the Pakistani board which was headed by Justice Abdul Sami Khan.
Saeed was put under house arrest after Mumbai terror attacks in November 2008 but he was freed by court in 2009.
The decision in Lahore also flies in the face of a USA offer of a $10 million bounty for Saeed for his suspected role in the Mumbai attacks. "And in case of Saeed, a designated terrorist, it also shows how Pakistan is hoodwinking the worldwide community on the issue of terrorism", a source said.
However, the board remained unsatisfied with the government's point of view and set aside the detention of Saeed and ordered his release.
The United States had offered a $10 million bounty for information leading to the arrest and conviction of Jamaat-ud-Dawa (JuD) chief Saeed. "It is time to rescind Pakistan's status as a major non-NATO ally", Bruce Riedel, a top United States expert on security, South Asia and counter-terrorism said.
"My fear is that mixed signals will lead to a situation in which Pakistan fails to take decisive action against Afghan-oriented and India-oriented terrorist groups", he said.
India has accused Hafiz Saeed of masterminding the Mumbai attack in November 2008 and the 2001 Parliament attack in Delhi.
Ayres said Pakistan can not credibly claim to be fighting terrorism while failing its most basic security obligation to UNSC designations.
"The release order only shows that Pakistan provides free space to terrorists to indulge in acts against other countries".
"The United States reiterates its stance that LeT is a designated Foreign Terrorist Organization responsible for the death of hundreds of innocent civilians in terrorist attacks, including a number of American citizens", a State Department Spokesperson told PTI.
Punjab Assistant Advocate General Sattar Sahil said the government law officer had presented "some important evidence" to justify detention of Saeed but all three members of the board unanimously rejected it and ordered his release.