Former IMF chief Dominique Strauss-Kahn has been released from house arrest and had his $6m (£3.7m) cash bail and bond returned amid doubts over the credibility of his accuser.
Prosecutors have agreed that Mr Strauss-Kahn should be freed “on his own recognisance”, meaning he must simply promise to appear in court.
He is accused of sexually assaulting a maid in a New York hotel on 14 May.
The case is now close to collapse, US media reports say.
The 62-year-old French politician – who had been seen as a leading candidate for the French presidency – appeared in court in New York on Friday over the sexual assault case.
After assessing disclosures by prosecutors from the office of the Manhattan district attorney, a judge rescinded the strict bail terms imposed on Mr Strauss-Kahn, but did order that his passport be retained so he could not travel outside the US.
In a letter submitted to the court prosecutors said that the maid gave false testimony to a grand jury, omitting the fact that she cleaned another room before alerting a supervisor to her claims of sexual assault.
“I understand that the circumstances of this case have changed substantially, and I agree the risk that he would not be here has receded quite a bit. I release Mr Strauss-Kahn at his own recognisance,” Justice Michael Obus told the court on Friday.
“In the meantime there will be no rush to judgment on this case,” Mr Obus said.
On the court steps, opposing lawyers each maintained their case.
“I want to remind all of you that at each appearance in the last six weeks, we asked you and asked the world not to rush to judgement – now I think you can understand why,” said Mr Strauss-Kahn’s lawyer, William Taylor.
“We believe the next step will lead to the complete dismissal of the charges,” he added.
After Friday’s hearing, Mr Strauss-Kahn strode out of court smiling, with his wife on his arm.
In earlier court hearings, prosecutors had spoken of the strength of their case. One attorney said the proof against him was “substantial”.
Now prosecutors believe she may have lied under questioning and could have links to drug dealers and money-laundering.
But the alleged victim’s lawyer, Kenneth P Thompson, maintained on Friday that his client’s story was genuine and that Mr Strauss-Kahn was guilty of sexual assault charges.
“The only defence Dominique Strauss-Kahn has is that this sexual encounter was consensual. That is a lie,” he said.
He continued at length, giving a detailed and graphic account of the maid’s alleged encounter with Mr Strauss-Kahn and criticising District Attorney Cyrus Vance Jr.
Mr Vance said the case would continue to be investigated, including concerns that had been raised about the credibility of Mr Strauss-Kahn’s accuser.
“Our prosecutors from the Manhattan DA’s office will continue their investigation into these alleged crimes and will do so until we have uncovered all relevant facts,” he said.
Mr Strauss-Kahn is to appear back in court on 18 July.
The maid claims that Mr Strauss-Kahn chased her down a hallway in his expensive hotel suite in the Sofitel hotel before sexually assaulting her.
However, unnamed law enforcement officials have now told US media the accuser has repeatedly lied since the alleged attack on 14 May.
The officials believe the woman also lied on her application for asylum in the US, particularly over an allegation that she had been raped while at home in Guinea, in West Africa.
“She actually recounted the entire story to prosecutors and later said it was false,” one law enforcement official told the Associated Press news agency.
But Mr Thompson defended his client’s story on Friday, offering up graphic details of the alleged encounter between Mr Strauss-Kahn and the maid.
“From day one she has described a violent sexual assault that Dominique Strauss-Kahn committed against her,” Mr Thompson said, adding that Mr Strauss-Kahn bruised the maid’s body and threw her to the floor.
“She has never once changed a single thing about that account. The district attorney knows that,” he added.
Mr Thompson said that though the maid “may have made some mistakes”, that does not mean the assault never occurred.
Following the twists to the sexual assault case on Friday, hopes among some have been raised about the possibility Mr Strauss-Kahn may once again be able to compete with Nicolas Sarkozy for the French presidency in 2012.
The Socialist former Prime Minister, Lionel Jospin, said: “It’s a thunderbolt – but in the opposite direction this time.”
But it was too soon to say whether Mr Strauss-Kahn might stand, he added.
“If we hypothesise that Dominique is cleared of all suspicion and all charges, which I obviously hope will happen, then it will be first down to him to decide… and then it will be down to the Socialists to decide.”
“It’s too early to transform into politics what is so far a human drama which is developing before our eyes.”
Mr Strauss-Kahn had been under house arrest in a New York apartment since posting a $6m (£3.7m) cash bail and bond in May.
He is charged with seven counts including four more serious felony charges – two of criminal sexual acts, one of attempted rape and one of sexual abuse – plus three misdemeanour offences, including unlawful imprisonment.
Mr Strauss-Kahn, who resigned as head of the International Monetary Fund to defend himself, vigorously denies the charges.