Nguyen Phuong Uyen, sentenced in May for distributing anti-government leaflets, was freed after the court ruling Friday.
"There were many surprises," her lawyer, Nguyen Thanh Luong, told RFA.
"Nguyen Phuong Uyen now has a suspended three-year sentence and was freed at the trial ... [though she] also has another 52 months of probation."
The court reduced by half the 8-year sentence of her 25-year-old co-defendant Dinh Nguyen Kha in what the lawyer said was a rare display of clemency. However, Kha was given three years of probation to be served following his release from jail.
The court decision comes after last month's meeting between President Barack Obama and Vietnamese President Truong Tan Sang, during which Obama raised the issue of Vietnam improving its human rights record.
The two defendants were arrested in October during a protest against China's overlapping claims with Vietnam to islands in the South China Sea. They were sentenced in Long An province in the Mekong Delta region of southern Vietnam in May under Article 88 of the Vietnamese Penal Code.
Both Uyen and Kha represented themselves during the appeal hearing, which neither defendant's family members were allowed to attend.
Uyen maintained she had spoken out against the ruling Communist Party, but didn't make anti-state remarks. She said she had been sentenced unfairly under Article 88 that has a maximum sentence of 20 years in prison.
RFA said prosecutors originally sought to uphold Uyen's six-year prison sentence and reduce Kha's sentence to between five and six years.
Around 100 supporters had gathered outside of the appeal court calling for the defendants to be freed.
Some protesters were detained by police, but released before the end of the hearing, observers told RFA.
Thanh Luong said prosecutors abruptly changed their position without an explanation, prompting observers to suggest Vietnam's leadership may have intervened because of international pressure.
It was "likely that international pressure had something to do with this outcome" and the result was "beyond expectations," said Phil Robertson of Human Rights Watch, based in New York.
"It doesn't change the fact that these two youths never should have been charged or imprisoned in the first place."
Their release comes as a group of activists -- including members of the ruling Communist Party -- said they will form the Democratic Socialist Party to promote multiparty democracy in Vietnam, the BBC reported.
Among the activists are prominent members of the Communist organization Fatherland Front.
The BBC reported there had been "months of unusually lively debate over the political system" after the government asked for public feedback on proposals for reform of the Soviet-style constitution which enshrines the Communists in power.
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