Al-Araibi has been jailed in a Bangkok prison since late November with his country of birth Bahrain keen to extradite the Australian refugee to serve a 10-year prison term he received in absentia.
A Thai court approved the request to drop extradition proceedings, according to Chatchom Akapin, director general of Foreign Affairs for the Office of the Attorney General.
Court spokesman Suriyan Hongvilai said that Hakeem al-Araibi, who lives and plays professional soccer in Australia, was being processed for release.
Former Socceroos captain and prominent broadcaster Craig Foster led the campaign to have him freed, ABC News in Australia reported.
Bahrain has now dropped an extradition request made to Thailand, paving the way for Al-Araibi to return to Australia.More news: Ariana Grande, A No-Show, Wins First Ever Grammy Award
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What began as a honeymoon turned into a two-month nightmare, but at last Hakeem al-Araibi's ordeal is over.
The 25-year-old fears being returned to Bahrain where he believes he could face imprisonment and torture.
"The Thai government should see that Bahrain's sole motive is to further punish Hakeem for the peaceful political opinions he expressed", Amnesty International Thailand campaigner Katherine Gerson said in an earlier statement.
Al-Araibi has said he was blindfolded and had his legs beaten while he was held in Bahrain previously.
"We had a phone call from the Foreign Affairs Ministry this morning and they said Bahrain doesn't want him anymore", Chatchom told BBC. The Australian government, Fifa and other football bodies have supported his case.