Many families of the victims in the 1988 bombing over Lockerbie, in which 270 people died, have expressed anger over the 57-year-old's release.
Despite a US warning against a "hero's welcome" in the Libyan capital, hundreds of young people greeted al-Megrahi's aircraft as it landed, waving Libyan and Scottish flags.
Kenny MacAskill, Scotland's justice minister, decided to free al-Megrahi after hearing the former intelligence agent is dying from advanced prostate cancer and does not have long to live.
"It is my decision that Mr al-Megrahi ... be released on compassionate grounds and be returned to Libya to die," MacAskill said.
Al-Megrahi landed in Tripoli on Thursday, hours after being freed from Greenock prison in Scotland. He had served eight years of a minimum 27-year sentence.
Amr El-Kahky, Al Jazeera's correspondent in Tripoli, said al-Megrahi did not attend main celebrations in the city, but there were rumours as to the reason why.
"A lot of people will tell you his health is really ailing and he did not go to the public party in downtown Tripoli.
"Others will tell you it must be the pressure from the United States and other countries who are really angry that al-Megrahi has been released and they want to see very little of him on the street," he said.
President Barack Obama on Friday called Libya's welcome for al-Megrahi "highly objectionable".
Robert Gibbs, the White House press spokesman, said that Washington had told Tripoli of its concerns over the release of the former agent.
"We communicated with the Libyan government, we continue to watch what they do in the days going forward about this individual, and understand that the video that you saw yesterday was tremendously offensive to the survivors that lost a loved one in 1988," Gibbs said.
Senior US officials said that al-Megrahi's early release could disrupt diplomatic relations between Washington and Tripoli.
"What they will do going forward is going to have some kind of effect in our relationship," Ian Kelly, US state department spokesman, said.
"Libya has made every indication to us that they want to put their connection with terrorism in the past. So I think we're going to be watching very closely in the days and weeks ahead to see if indeed they do want to see these kinds of incidents in their past," he said.
Al-Megrahi, who has always protested his innocence, was released from Greenock prison in Scotland and escorted by a police convoy to Prestwick airport in Glasgow on Thursday afternoon.
"I have been faced with an appalling choice: to risk dying in prison in the hope that my name is cleared posthumously or to return home still carrying the weight of the guilty verdict, which will never now be lifted"
Abdel Basset al-Megrahi
In a statement following his release, al-Megrahi said: "I am obviously very relieved to be leaving my prison cell at last and returning to Libya, my homeland.
"The remaining days of my life are being lived under the shadow of the wrongness of my conviction.
"I have been faced with an appalling choice: to risk dying in prison in the hope that my name is cleared posthumously or to return home still carrying the weight of the guilty verdict, which will never now be lifted."
His release came days after he dropped his second appeal against his conviction, paving the way for an application for his early release or a prisoner transfer to be considered.
But Guma el Gamaty, a Libyan writer and political scientist in London, said al-Megrahi's appeal would have been "very important".
"It would have revealed a lot of new information. But a lot of parties were not keen for it to go ahead because it would have shown new evidence which would probably reflect that al-Megrahi was not the culprit or at least not the main culprit.
"The appeal might have shown also that there has been manipulation of evidence ... so I think all parties had an interest for that not to go ahead including the British and American authorities."
|Al-Megrahi has been diagnosed with advanced prostate cancer [EPA]
"All the signs are there that there has been a political deal that has been carefully crafted by all the political parties involved I think," he said.
Marwan Bishara, Al Jazeera's senior political analyst, said political motivations may have influenced the decision to release al-Megrahi.
"There's an understanding that with Libya now head of the African Union, and with it becoming the head of the UN General Assembly and a leading oil exporter, the idea of normalising relations with Libya in this kind of way is important and necessary.
Omar Turbi, an expert in US-Libyan relations, said that the release could pose a dilemma for the Libyan authorities, given that in 2001 it accepted responsibility for the Lockerbie bombing.
"Will they move forward in their history and time, thinking, 'Okay, we want the world to think that we took revenge over America's [military] bombing of Tripoli in 1986, or shall we really take this stigma out of the world's view of us and clear it once and for all?'," he said.
"Libya is going to live with this stigma forever if it does not take a proactive step to clear its name."
Al-Megrahi lost an appeal in 2002 and last year failed to secure his release on the grounds that he was dying.
His lawyers began an appeal in May this year at a court in Edinburgh, saying the case against him was flawed.
The attack on flight 103 on December 21, 1988, killed all 259 people on board and 11 on the ground.
Four years after al-Megrahi's conviction in 2001, Libya admitted responsibility and paid about $2.7bn in compensation to the families of those killed.
The move prompted the lifting of international sanctions against Libya and led to a restoration in diplomatic ties between Tripoli and the West.