The ruling means Puigdemont, who fled Spain five months ago for Belgium after Spanish Prime Minister Mariano Rajoy dismissed his regional administration, can not be tried for rebellion in Spain once extradited on the lesser charge, a German court spokeswoman said.
The court ordered Puigdemont's release on about $90,000 bail.
Spain's Supreme Court reactivated global arrest warrants last month for Puigdemont and four other Catalan politicians who went into self-imposed exile past year.
He was arrested in the north German region last month, after Spain issued a European arrest warrant. The High Administrative Court of Schleswig-Holstein granted bail to Puildemont for $ 75,000 euros, considering that the risk of escape prevails but in a lesser degree, after ruling out the crime of rebellion. It wasn't immediately clear when he would be released, though it appeared unlikely before Friday morning.
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"Puigdemont's Barcelona-based lawyer Jaime Alonso-Cuevillas tweeted: "[Puigdemont] always said that he had full confidence in the German judiciary".
The German judges will consider Puigdemont's extradition on the less serious charge of misusing public funds.
But in a blow to the Spanish probe, a northern German state court ruled Thursday that the lack of violence in the Catalan independence bid meant that Puigdemont can't be punished for rebellion under German law.
The official, who spoke on customary condition of anonymity, said "Spanish justice will adopt the appropriate measures in the face of these new circumstances".
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World leaders and global organisations such as the United Nations have repeatedly referred to the violence as ethnic cleansing. This right extends to migrants, who may be detained only in exceptional circumstances and in accordance with global law.
"That is not the case here", the court said in a statement.
If Puigdemont makes the bail payment and leaves prison, he can't leave Germany without prosecutors' approval, must inform prosecutors of every change of residence and report to police once a week, court spokeswoman Frauke Holmer said.
The Catalan separatist leader could still be extradited on a charge of misusing public funds, the judges added, although "further facts must be clarified and information gathered" in the coming days and weeks.
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