The separatist leader is wanted on Spain on charges of corruption, rebellion and sedition for his part in the region's push for independence from Spain.
German authorities must still evaluate Spain's extradition request for Puigdemont, German media reported, and Puigdemont was asked to pay €75,000 to be released.
If extradited only on the charge of misusing public funds, Puigdemont can not be prosecuted in Spain on the more serious charge of rebellion.
The official, who spoke under customary anonymity, said "Spanish justice will adopt the appropriate measures in the face of these new circumstances".
The misuse of public funds charge relates to the cost of the Catalan independence referendum, estimated at 1.6 million euros by Madrid.
Puigdemont was arrested on entering Germany last month on a Spanish-issued warrant.
"The actions for which the subject is being prosecuted would not be criminal under German law", the court spokeswoman said.
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Madrid also accuses Puigdemont of misuse of public funds.
The court has been considering what to do about a Spanish extradition request for Mr Puigdemont for more than a week.
Former Catalan separatist leader Carles Puigdemont has written an open letter from a German prison, urging Catalonia's parliament to make another attempt to elect jailed separatist activist Jordi Sanchez as the region's president.
The charge of rebellion can bring up to 25 years in prison in Spain. "But since extradition on rebellion charges is impermissible, the risk of flight is substantially lessened".
Spain's Constitutional Court established a year ago that Catalonia's referendum and subsequent declaration of independence were unconstitutional.
The Spanish government's quelling of the October 1 independence referendum drew global condemnation and outrage, with footage of national police officers and members of the Civil Guardia seizing ballot boxes and violently dispersing voters going viral on social media.