U.S. officials said Daqdouq -- who they described as a 24-year veteran of Hezbollah -- organized a kidnapping in January 2007 that resulted in the death of five U.S. soldiers.
Daqdouq's attorney, Abdulalmehdi al-Mutairi, told CNN his client arrived in his native Lebanon Friday.
"There is no legal reason for his detention," the attorney said. "He should have been released months ago."
An Iraqi court ruled in May there was insufficient evidence to try Daqdouq, and an appeals panel upheld the ruling in June.
"We continue to believe that Daqdouq should be held accountable for his crimes," U.S. State Department spokeswoman Victoria Nuland said.
"While we strongly object to his release, we've been informed by the Iraqis that they determined that they were no longer able to hold him under Iraqi law."
U.S. Sen. John McCain, R-Ariz., called the release of Daqdouq "an outrage."
"The families of those who were killed by this terrorist should also be outraged and appropriate action should be taken as regards to our relations with the Iraqi government," McCain said.
Nuland said the State Department is in contact with the Lebanese government and will pursue all "legal means" to bring Daqdouq to justice, CNN reported.