Jose Dirceu was sentenced to 32 years in prison over corruption charges linked to state oil company Petrobras.
The massive bribery scheme allegedly involved congressmen taking payments in exchange for votes.
But the country’s supreme court has now ruled he could be placed under house arrest until his appeal is heard.
Dirceu has been imprisoned since August 2015.
Under Brazilian law, defendants usually have the right to a first judicial appeal before sentences are put into effect, the BBC’s Julia Carneiro in Rio de Janeiro reports.
The so-called “Car Wash” scandal had placed Brazil in the depths of a political crisis, with lawmakers from all parties discredited by the culture of bribe-taking, our correspondent adds.
On the same day that that the supreme court ruled by three to two to release Dirceu, investigators filed fresh corruption allegations against him.
The investigation’s chief prosecutor, Deltan Dallagnol, criticised the decision to release Dirceu.
“Jose Dirceu’s freedom would pose a serious threat to society because of the seriousness of the crimes committed as well as the repetition of those crimes and the influence he has on the party’s system,” he said.
“A fact we see more and more in the ‘Car Wash’ is that corruption has permeated various levels of the government, which means that changing government won’t have an impact on the possibility of new crimes.”
Dirceu, now aged 71, was formerly the chief of staff to President Luiz Inacio Lula da Silva, where he was the president’s right-hand man and one of the most powerful figures in government.
President Lula was not implicated in the scandal himself at the time, but has since faced a number of accusations.
Dirceu was once seen as possible successor to Mr Lula da Silva, until he was accused of being the mastermind behind the bribery scheme, and convicted on corruption and money laundering charges.
Instead, Mr Lula was succeeded by Dilma Rousseff, who was impeached in 2016 for manipulating government accounts, although she was never formally accused in the corruption scandal.