Belal Saadallah Khazaal finished a 12-year term in August 2020 for creating a 110-page terrorism advice book that included content on shooting down planes and assassinating former US president George W Bush and others.
The Sydney man, 51, was returned to custody on April 30, having been accused of thrice breaching his supervision order.
Noting the "very substantial" wait Khazaal faced until trial and questions over the strength of the crown case for one offence, Justice Hament Dhanji granted Khazaal bail on Monday.
The NSW Supreme Court judge set a $400,000 surety and conditions that the accused man only leave his Greenacre home when with his wife and for specific reasons such as reporting to police.
But upon the decision, the Commonwealth Director of Public Prosecutions told the court it will appeal the release decision.
An appeal is due to be heard in coming weeks.
The man also known as Bilal Khazal is accused of trying to communicate with Ali al-Talebi, through his sister on March 30.
Al-Talebi, 31, is serving a minimum nine-year term for attempting to send thousands of dollars to Islamic State in 2014 and has spent time with Khazaal in Goulburn's supermax prison.
Two further breaches allegedly occurred when Khazaal drove his wife to the sister's home on April 10 and an envelope of about $4650 was transferred in the driveway.
Khazaal's wife says it was her decision to physically hand over her money to assist the sister, the court was told.
Painting a different picture, prosecutors presented transcripts of the trio's alleged conversation, in which Khazaal told the sister the money had "nothing to do with you".
"This is an agreement between me and him," Khazaal is alleged to have said.
"That's proof of his intention to contravene the order, irrespective of whose money it was," Lester Fernandez, for the CDPP, said.
The control order required Khazaal to tell federal police if he was involved in a money transfer exceeding $500.
Justice Dhanji said the crown case was reasonably strong and handwriting on the envelope suggested "at least a very remarkable similarity" to Khazaal's.
The case was weaker for the March 30 allegation, he said, pointing to the defence argument that Khazaal had merely commented on the fact he'd congratulated the sister for wearing a hijab before al-Talebi had done so.
A stay of a bail decision under appeal is meant to expire after 72 hours, under commonwealth law.
However, on application by the CDPP, Justice Dhanji agreed to delay officially granting bail, allowing the appeal court more flexibility to hear the appeal.
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