Bicky Deuba, the former prime minister's nephew, said on Monday: "He has been released. He is at home and in good health."
The Royal Commission for Corruption Control, formed last year after King Gyanendra sacked Deuba and assumed absolute power, had jailed Deuba after accusing him of embezzling $5.3 million in awarding a contract to supply drinking water to Kathmandu.
Deep Kumar Upadhyay, a central committee leader of Deuba's Nepali Congress (Democratic) party, confirmed the former prime minister had been released, as did party spokesman Minendra Rijal.
But there was no official word on the release. Earlier in the day, the court dissolved the controversial anti-corruption panel saying it was established "against the spirit of the constitution".
It also outlawed all decisions taken by the commission, paving the way for Deuba's release. Deuba was sacked by King Gyanendra last year for failing to curb a Maoist insurgency which has killed more than 13,000 people since it began in 1996.
However, analysts say the king's one-year rule had not improved the situation. Maoist leader Prachanda said in an interview broadcast on Monday that King Gyanendra would ultimately be exiled or executed because he had closed the door to any political compromise since seizing absolute power.
"He has been released. He is at home and in good health"
Bicky Deuba, nephew of
Sher Bahadur Deuba
Prachanda, who has lived an underground existence for more than two decades, last year forged a loose alliance with the main political parties to topple the king and restore democracy.
"I believe that it will be a republic state in less than five years," Prachanda said of Nepal in the interview with the BBC.