No official announcement was made by the government but family members have been talking to media. His nephew told the BBC that the Roman Catholic priest, in poor health because of two strokes last year, is home in the city of Hue.
Ly, 63, may not be totally free, according to some reports. His release could be to allow him to seek medical attention before his return to prison.
Ly was sentenced in 2007 to eight years in prison for disseminating anti-government literature, only two years after a previous prison release.
His one-day trial in 2007 in Hue was notable not for its short duration and long sentence.
It was also notable for his shouting slogans including "Down with the Communist Party," which has ruled the country since communist troops defeated national forces in 1975. Press photos spread around the world of a man behind Ly forcibly muzzling the priest to keep him quiet.
Ly has spent more than 15 years on and off in prison since 1977 and is a founding member of the pro democracy group Bloc 8406, named after the date of its manifesto published April 8, 2006. The document seeking a multi-party democracy was signed by 118 activists including Ly as well as academics, nurses, teachers and even former Communist Party members. Support has grown to the thousands, Human Rights Watch has claimed.
Freedom Now, a legal advocacy organization in Washington, welcomed Ly's release. The organization posted a picture on ISR Web site of a smiling Ly surrounded by several members of his diocese in Hue shortly after his release and return to the city this week.
Freedom Now is Ly's international legal counsel and has acted on his behalf since 2008. On Feb. 27, 2009, Freedom Now filed a petition with the U.N. Working Group on Arbitrary Detention seeking a declaration that Ly's arrest, trial and detention violated international law.
Last July a bipartisan group of 37 members of the U.S. Senate, led by Barbara Boxer, D-Calif., and Sam Brownback, R-Kan., working with Freedom Now, requested Vietnamese President Nguyen Minh Triet release Ly. They noted "serious flaws" in Ly's arrest, trial and imprisonment.
According to Freedom Now, Ly had been under administrative detention in March 2001 for "slandering" the Communist Party and allegedly "distorting" the government's policy on religion. He was also banned him from operating his church.
Ly was formally invited to testify before the U.S. Commission on International Religious Freedom in February 2001 but the Vietnamese government denied him permission to leave the country. Instead, he submitted written testimony urging the United States to draw back from a U.S.-Vietnamese trade pact because of human rights abuses in Vietnam.
Ly was officially released from prison in January 2005 along with 8,300 prisoners just before the February lunar New Year holiday. But he was re-arrested in 2007 and returned to jail this last time.
The government also released another Bloc 8406 supporter earlier this month, the lawyer Le Thi Cong Nhan, the BBC said.