The Schleswig-Holstein court said he could still face corruption charges in Spain, and it has only suspended extradition - not ruled it out.
In a heavy blow to the Spanish government, the court in northern Germany ruled that the main charge of rebellion against Puigdemont could not be used as grounds for extradition, since the comparable German charge of treason specifies violence.
Mr Puigdemont is accused by the Spanish authorities of rebellion and misuse of public funds following an unauthorised referendum a year ago on Catalonia's independence from Spain.
It set bail at €75,000 (US$91,710).
The 55-year-old was detained in Germany on a Spanish arrest warrant as he attempted to drive from Finland to Belgium on 25 March.
The regional court in the state of Schleswig-Holstein ruled that the charge of rebellion can not be honoured in Germany "because the criteria of "violence" is not present". The court will therefore consider his extradition on the basis of the lesser charge of misuse of public funds.
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A Spanish government spokeswoman said earlier that Spain respects the German court's decision.
Former Catalan separatist leader Carles Puigdemont has written an open letter from a German prison, urging Catalonia's parliament to make another attempt to elect jailed separatist activist Jordi Sanchez as the region's president.
Sanchez said in a letter from a Madrid jail published Thursday that he was ready to try again to be elected.
Also Thursday, Spanish police arrested Josep Lluís Trapero, the former head of the Catalan police force, for his alleged role in the independence bid.
The judge concluded [press release, in Spanish] that Trapero facilitated the execution of the referendum by instructing the force to disregard orders from the Spain's national government to block the vote.