Abu Bakar Bashir was released after spending 25 months behind bars for his part in the conspiracy that led to the nightclub bombings, which killed 202 people.
"We are deeply disappointed by what we would consider a light sentence that was handed down to this individual," Sean McCormack, spokesman for the U.S. State Department said of the release.
Australian Prime Minister John Howard echoed that sentiment, "I want [Indonesia's politicians] to understand from me, on behalf of the government, how extremely disappointed, even distressed, millions of Australians will be at the release."
Bashir is the alleged spiritual leader of Jemaah Islamyiah, an al Qaeda connected group believed to have been behind the Bali bombings and several other terrorist attacks in Southeast Asia during the last six years.
Bashir denies any affiliation to the group and has claimed it does not exist.
Judges found that Bashir had "committed the crime of evil conspiracy," which led to the bombings, but acquitted him on more serious terrorism charges saying they found no direct link to the attacks.
"There is a weakness in the law here," said Rohan Gunaratna, a terrorism expert based in Singapore. "Bashir's release will only embolden the jihadis to re-energize and re-group."
Bashir is the founder of the al-Mukmin Muslim boarding school near Solo attended by some of the Bali bombers. He plans to return to the school to resume his teaching.