A medical helicopter was seen departing from Tora prison on the southern outskirts of Cairo.
It landed minutes later at the military hospital in the nearby suburb of Maadi.
The decision to release him was authorised under Egypt's Emergency Law recently enacted under a security crackdown on Islamists.
By keeping Mr Mubarak under house arrest, Egyptian leaders may be trying to show they will not be too lenient with him to avoid angering the many Egyptians who held mass protests that led to the end of his iron rule in 2011.
Two groups of activists have already called for sit-ins in Cairo to protest his release.
Mr Mubarak, 85, was sentenced to life in prison last year for failing to prevent the killing of demonstrators. But a court accepted his appeal earlier this year and ordered a retrial.
Yesterday’s court ruling removed the last legal ground for his imprisonment in connection with a corruption case, following a similar decision in another corruption case on Monday.
Mr Mubarak will not be allowed to leave Egypt and his assets remain frozen.
Political turbulence has kept Egypt on edge for months. At least 900 people, including 100 soldiers and police, have been killed in a crackdown against ousted president Mohammed Mursi's supporters in the past week, making it the country's bloodiest internal episode in decades.
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