Mohammed al-Tabtabaei had spent a year in detention at Abu Ghraib prison in Baghdad, but was freed without charge, they said. He was detained during the first of two uprisings mounted last year by al-Sadr across southern Iraq.
The US military confirmed his release.
Al-Sadr himself faces an arrest warrant for murder issued under the US occupation authority in 2003. But he has been largely left alone by the Iraqi authorities since he agreed to disband his al-Mahdi Army following fighting last August.
The circumstances of al-Tabtabaei's arrest caused controversy; after it, a US officer was convicted of assault with intent to commit manslaughter for what he had described as the "mercy killing" of a wounded driver working for al-Sadr's organisation.
Captain Rogelio Maynulet walked free after his conviction.
Al-Sadr (L) has agreed to disband
his al-Mahdi Army
Al-Tabtabaei was arrested near the Shia holy city of Najaf after US troops fired on his car, wounding him and killing the driver.
US forces have arrested a number of al-Sadr aides in the past two years, many of whom are still in custody.
Shia leader's call
The leader of Iraq's biggest Shia political group has meanwhile warned against sectarian strife and called on the Iraqi government to exert more effort in quelling violence.
Abdul-Aziz al-Hakim, the leader of the Supreme Council for the Islamic Revolution in Iraq (SCIRI), made the call a day after gunmen killed a prominent Shia cleric.
"We stress the importance of being alert and cautious not to be carried away toward the sectarian strife that our enemies want for us," al-Hakim, a National Assembly member, said in a statement on Saturday.
"We ask the Iraqi government, particularly the security apparatuses, to exert more efforts to strike these terrorist groups."
"We ask the Iraqi government, particularly the security apparatuses, to exert more efforts to strike these terrorist groups"
Leader, Supreme Council for the Islamic Revolution in Iraq
On Friday, attackers killed Kamaleddin al-Ghuraifi, an aide to Iraq's most influential Shia cleric - Grand Ayat Allah Ali al-Sistani. Also on Friday, masked gunmen stormed a Sunni mosque in Baghdad and took a Muslim preacher captive.
Al-Hakim said Iraq's judicial bodies should speed up procedures to try suspects, warning that Iraqis were starting to lose faith in the system.
"We ask the Iraqi courts to hurry up in trying these criminals and in carrying out the death sentence against those who deserve it and not to stall and find irresponsible excuses," he said.
He asked Iraqis to stand up to their attackers. "We ask all the honourable people and the sons of Iraq, particularly our alert and brave youth, to confront these criminal gangs and to defend their sanctities and clerics and to cooperate with the security bodies."
Iraqi Shia mourners carried the body of al-Ghuraifi in a funeral
procession through Najaf ahead of an impassioned address by Prime Minister Ibrahim al-Jaafari, who held him up as a martyr.
Several hundred people carried the bodies of al-Ghuraifi and two of his guards from Midan Square towards the shrine of the first Shia imam Ali, a day after they were gunned down in Baghdad on their way to Friday prayers.
"Let the whole world and the countries of the region know that it is a battle of values and principles and not a matter of
resistance and occupation," al-Jaafari said.
"The tree of liberty will be watered with blood," he added.