Officials seized some 1,400 items, including 1,280 artworks, from Cornelius Gurlitt's apartment in 2012 while investigating a tax case. Gurlitt's lawyers appealed the seizure, arguing that the art wasn't relevant as evidence for prosecutors' suspicions of import tax evasion. He also said that seizing the entire collection was disproportionate.
Augsburg prosecutor Matthias Nickolai said in a statement that the works were formally released after prosecutors re-evaluated the legal situation. He said prosecutors had been "absolutely convinced" at the time of the seizure that it was legally correct.
Gurlitt and the German government announced a separate agreement on Monday under which at least 458 works owned by the collector that are being checked for a Nazi-era past will stay in government hands.
Any work whose background search hasn't been completed in a year will be returned to Gurlitt, but the collector will continue to grant access for further work. Also, pieces will be held in trust if restitution claims are pending on them after the year is up.
Prosecutors did not close the tax case against Gurlitt, the 81-year-old son of a Nazi-era art dealer.
It wasn't immediately clear when and how the art trove would be returned to Gurlitt, though the collector's spokesman, Stephan Holzinger, said his representatives are working hard to find "a sensible solution."
Gurlitt inherited the collection — which includes works by Pablo Picasso, Marc Chagall and Pierre-Auguste Renoir — from his father Hildebrand Gurlitt, an art dealer who traded in works confiscated by the Nazis.
Gurlitt's representatives are in talks with several claimants seeking restitution.
Gurlitt's lawyer, Tido Park, said that "his rehabilitation will be further strengthened by today's decision. So this is a good day for Cornelius Gurlitt."
Geir Moulson contributed from Berlin.