Lynch, 20, is now free to tell the story of her treatment at the hands of Iraqis and her high profile rescue that generated worldwide interest.
While the US army claimed it to be a heroic resuce, critics say the operation was an over-hyped, staged operation with soldiers storming the Iraqi hospital when they knew the Iraqi military had gone.
"She has been medically retired due to disability from injuries," Beverly Chidel, a spokeswoman at Walter Reed Army Medical Centre said.
Following her discharge last Friday, publishing houses expect the baby-faced Lynch to sign a book deal soon.
Several big publishers, including Alfred A.Knopf, Doubleday and Simon & Schuster have already made bids to bring out her authorised biography.
The publishing industry expects her autobiography to be a runaway hit, considering that Lynch came to symbolise US patriotism following her rescue.
'She has been medically retired due to disability from injuries'
US Army Spokeswoman
Lynch was captured by Iraqi forces on 23 March near the city of Nassiriya. She was rescued by US commandos on 1 April from a hospital where she had received care from Iraqi medical personnel.
Publicists of the US army spun the story of her rescue around and Lynch was instantly transformed into an American icon.
Army officials initially said she had fought fiercely before being captured. But investigations later concluded that Lynch was injured when her Humvee crashed into another vehicle in the convoy after being hit by a rocket-propelled grenade.
Even claims of a heroic rescue were later discounted. But despite the stories falling flat, Lynch has remained a media darling and the attention on her has not waned.
She returned home last month amid rousing receptions and was awarded the Bronze Star, the Purple Heart and the Prisoner of War medals.