Police detained the man, a German convert to Islam, on August 17th in the town on Eisenhüttenstadt in Brandenburg after receiving a tip off from a member of the public.
In subsequent searches of his apartment, investigators found an Isis flag, combat attire, a fake pistol and several firecrackers.
Prosecutors alleged that the 27-year-old and an accomplice were planning an attack on a street festival which took place later in the month.
But on Tuesday the man's detention order was lifted, with prosecutors claiming there was no further “danger of collusion”, broadcaster RBB reports.
The investigation of the man is however ongoing. Prosecutors have seized computers and mobile telephones from his property and are continuing to evaluate their contents.
Once this process is finished, they will make a decision on whether to press charges.