Israeli security sources on Tuesday said the former atomic reactor technician would be banned from travelling abroad and would also have his movements monitored. His phone would also be tapped.
A decision to spare Vanunu another arrest was taken at a top security meeting headed by Prime Minister Sharon.
Israel is apprehensive that a freed Vanunu – who was convicted of treason for leaking details about Israel's nuclear reactor at Dimona to a British newspaper in 1986 - might spill more secrets about Israel's undisclosed nuclear programmes.
"A proposal to place Vanunu under administrative arrest on his release from jail was rejected," Sharon's office said, referring to detention without trial under long-standing emergency regulations that could be hard to defend in court.
But it said in a statement that "proper supervisory measures will be applied to Vanunu in accordance with the law to prevent him from committing additional security crimes."
During the meeting in the prime minister's office, speakers voiced concern that even if Vanunu had no secrets left to tell, he could still spread harmful disinformation.
But they agreed there was no legal cause to put Vanunu in "administrative detention" once he left jail.
Vanunu, who worked at Israel's main reactor in the southern desert town of Dimona, is a hero to anti-nuclear campaigners and has been nominated for the Nobel Peace Prize.
Israel is ambiguous about its nuclear programme, but it is known to have clandestinely developed nuclear weapons.
Israeli media reported that agents from the Shin Bet internal security service went to Vanunu's prison on Tuesday and questioned him for three hours about his future plans.
Vanunu, who converted to Christianity, was recently reported to have expressed a wish to leave Israel for good.