The deal, in which the group renounced violence in return for being allowed to peacefully campaign for Islamic law, appears to be part of the new government's efforts to engage in dialogue with armed groups fighting against the state.
Battle to continue
But Muslim Khan, a spokesman for Fazlullah, said that fighters allied with Fazlullah will not cease battle.
"We welcome the release of Sufi Mohammed, but we will only lay down arms when the government would enforce Sharia," Khan said.
"We are fighting for the enforcement of Islam. If the government enforces Sharia today, we will stop our struggle.
"But we want to see practical steps from the government, and not just the promises."
Khan said that the fighters he spoke for have not seen the text of the accord signed by Mohammed.
Al Jazeera's Kamal Hyder, reporting from Malakand, in northwest Pakistan, said that there has been a sense of jubilation in the region with regard to the release of Sufi Mohammed.
"Sufi Mohammed controls Malakand, which is the gateway to the Swat Valley, and he has tens of thousands of supporters, who lined the streets today, celebrating the end of seven years of detention for Mohammed in a maximum security prison," he said.
"Fazlullah has been saying that the imposition of Sharia is the primary objective and a primary demand. Now it must be forgotten that Sufi Mohammed is also the father-in-law of Mullah Fazlullah, and he is a senior, influential figure - so when he speaks, everyone listens."
Last year, supporters of Fazlullah fought with security forces for control of the strategically important Swat Valley.
Major-General Athar Abbas, Pakistan's army spokesman, said that no decision had been made to withdraw the army from Swat Valley.
Sufi Mohammed, believed to be in his 70s, sent thousands to battle the US-led invasion of Afghanistan in 2001.
He has spent the past five months in a hospital in Peshawar due to ill health.
Mohammed was sentenced to three years for the illegal possession of a weapon but he remained in government custody until he was released and the accord was signed.
His group, Tehrik Nifaz-e-Sharia Muhammad (Movement for the Enforcement of Islamic Law), resurfaced under Fazlullah's leadership after his arrest in 2002.
Fazlullah's group, who is reportedly at odds with Mohammed, wants a Taliban-like system, including compulsory beards for men, mandatory veils for women and the outlawing of music and television.