Mahmud Abu Rida was arrested more than three years ago after Britain accused him of having links to al-Qaida leader Usama bin Ladin and of raising funds for terror operations.
"The terms and conditions of his release are still being worked out," a spokesman for Britain's Department of Constitutional Affairs said.
The bail decision by the Special Immigration Appeals Commission (SIAC), which reviews detainees' cases, comes just days after Britain announced plans to overhaul anti-terrorism laws which give police the power to jail foreigners without trial indefinitely if they are suspected of being involved in terrorism.
The legal overhaul plan followed a ruling last year by the UK's highest court, the Law Lords, that those powers, adopted in the wake of the 11 September 2001 attacks, violated basic rights.
Rida, who was born in Jordan to stateless Palestinian parents, arrived in Britain in 1995 and was given refugee status three years later, according to court documents.
Ex-home secretary Blunkett had
said Rida supported al-Qaida
He was arrested in December 2001, with then-home secretary David Blunkett saying Rida was "an active supporter of various terrorist groups, including those with links to Osama bin Ladin's terrorist network".
He is currently being held at Broadmoor hospital near London, a top security unit which houses some of Britain's most dangerous mentally ill criminals.
Under proposed new laws announced last week, Britain will no longer be able to jail suspects but instead will be able to place them under house arrest or possibly deport them.
The government said those held under the existing powers would stay in jail until the new law came into effect.
Rida was one of 17 foreigners, all Muslim and mostly North African, rounded up by British police shortly after the existing legislation was passed.
Of those, six have already been freed.
One was released after the UK said he was no longer a threat and another was freed on appeal.
The third was released but placed under house arrest and the fourth detained under the Mental Health Act instead.
Two others chose to leave Britain.
Three others, known only as "A", "C" and "P", are also due to have their applications for bail heard this week.