A statement from the group was received by the news network in which it said Christian Chesnot and Georges Malbrunot had been released and had been turned over to the French embassy in Baghdad.
The Islamic Army said the pair had been freed "because they were proven not to spy for US forces, in response to appeals and demands from Islamic institutions and bodies, and in appreciation of the French government's stand on the Iraq issue and the two journalists' stand on the Palestinian cause".
The pair would return to Paris on Wednesday, a French foreign ministry spokesman said.
"They have been freed. They have been handed over to French authorities. They will return on Wednesday," the spokesman, Herve Ladsous, said.
Four month captivity
Chesnot, of Radio France Internationale, and Le Figaro correspondent Malbrunot were seized on a road south of Baghdad on 20 August.
Didier Julia said the US thwarted
release efforts in September
On Monday, Foreign Minister Michel Barnier said he believed the two reporters were still alive and in good health.
Their Syrian driver Muhammad al-Jundi, who was captured with the journalists, was found in a house in Falluja on 12 November after US troops launched an attack on the city.
The Islamic Army in Iraq had called on Paris to scrap a controversial ban on wearing religious headscarves in state schools.
Hopes they would be released have been dashed several times, most notably when French lawmaker and self-appointed mediator Didier Julia announced during a September trip to Syria that their liberation was imminent.
Initial French diplomatic efforts to free the hostages failed, despite Paris's good relations in the Arab world and opposition to the invasion of Iraq in March 2003.