Haneef has denied any involvement in terrorism.
Earlier the Australian government had refused to restore the immigration visa of Haneef, even after dropping terrorism charges against him.
Kevin Andrews, Australia's immigration minister, said on Saturday that Haneef would be allowed to leave Australia.
His visa will not be restored and is, therefore, required to leave the country.
The Australian authorities dropped the case against him, saying there was a lack of evidence to prove his connection with the British plot and a mistake had been made.
He was in jail since his arrest on July 2.
Haneef was charged because last year he gave a mobile phone SIM card to his second cousin, Sabeel Ahmed, who has been charged with withholding information about last month's failed bombings in London and Glasgow.
Andrews said Haneef's lawyers had sought permission for him to leave Australia when he was released from custody on Friday.
"I have indicated that the Commonwealth has no objection to Dr Haneef leaving Australia," Andrews said.
He said Haneef would eventually have had to leave Australia in any case because his immigration visa was cancelled earlier this month.
Andrews, who has faced severe criticism for cancelling Haneef's visa, said he would seek to release material, not yet publicly available, on which he based the decision.
Haneef's lawyer said his client was homesick and wanted to return home
to his family in the southern Indian city of Bangalore as soon as possible.
"Mohamed is actually very homesick and he's actually probably pining for his wife and child. He's anxious to get back and see his mother," lawyer Peter Russo said.
| Peter Russo, Haneef's lawyer, |
said his client was very homesick
"We're stunned," Stephen Keim, another lawyer for Haneef, said. "We can't understand how a man, who has been locked up in prison for nearly a month on groundless reasons, could continue to have his good name be smeared with this decision."
Keim said Haneef's return home would not end the fight to clear his name. He added that the legal team had submitted a court application to appeal against the immigration office's decision to revoke Haneef's work visa.
"With the visa cancelled, it could have serious downstream effects on his work and travel. It is of paramount interest for Haneef to have an unblemished record," he said.
Police in Britain have charged three people over the car bomb attacks, including Sabeel, who is accused of failing to disclose information that could have prevented an attack.
Another of Haneef's second cousins, Kafeel Ahmed, remains in hospital after being badly burned when a Jeep was driven into an airport terminal in Glasgow and set ablaze.
Meanwhile, the Australian press said on Saturday that the bungled prosecution of the Indian doctor was an error that undermined confidence in anti-terror laws.
Newspapers said the evidence against him was flimsy at best, with several suggesting the prosecution was overzealously pursued for political reasons in the lead-up to a national election later this year.
"Injustice" ran the banner front page headline on Sydney's Daily Telegraph, with a photograph of Haneef leaving custody on Friday night alongside the sub-heading "portrait of a man whose life was ruined".