Police had temporarily detained a potential suspect after three explosions rocked the Dortmund team's bus on the way to a match, injuring a player and police officer. Officers searched his apartment as well as that of another potential suspect, who was not detained.
But on Thursday federal prosecutors say that there was no evidence the man - who was reportedly a suspected Islamist - had participated in the attack.
Prosecutors have however applied for an arrest warrent for the 26-year-old Iraqi man, identified as Abdul Beset A., due to suspicions that he is a member of Isis and led a terror unit in Iraq.
The daily Bild said that police had had Abdul Beset A. under surveillance for several months and believed, based on tapped telephone conversations, that he might be hiding explosives in his flat.
However a raid on his home Wednesday turned up blank, the report said, adding that investigators were still pursuing leads to the attack in the extreme right and far-left scenes.
Investigators believe Abdul Beset A. joined Isis in Iraq in late 2014 and was the commander of a unit of around ten fighters.
"The goal of the unit was to prepare kidnappings, abductions, extortion and killings," the prosecutors said.
He crossed the border into Turkey in March 2015 and continued on in early 2016 to Germany "where the suspect maintained contact with Isis members," they added.
Abdul Beset A. will appear on Thursday before a judge who will decide on prosecutors' application for the arrest warrant.
Prosecutors had said on Wednesday that there could be a "terrorist" link to the attack, and that they were also investigating possible Islamist motivations.
Three identical letters were found at the scene which included Islamist phrasing as well as demands that Germany withdraw its deployment of Tornado reconnaissance missions in the anti-Isis international coalition, and close the US air base in the western German town of Ramstein.
But sources close to the investigation also told DPA that the letters were unusual for the Islamist scene because there were no Isis symbols used.
Investigators have also stressed that they are still pursuing a range of other possible leads and have not ruled out that the attack could have also been perpetrated by violent football fans or extortionists, for example.
This is not the first time German police have made a quick arrest in the wake of an attack before backtracking on their suspicions.
After the truck attack in December on a Berlin Christmas market which killed 12 people, police also made a quick arrest.
A Pakistani man was detained within hours of the assault, after police stopped him in a park in west Berlin. But authorities released him the next day after no evidence linked him to the crime.
The man who carried out the terror attack was shot dead days later in Milan, after he fled to Italy via France.