A bail hearing was held in the High Court at Wellington this afternoon after the Privy Council in London unanimously decided to quash his convictions and ordered a retrial.
Justice Ronald Young ruled Lundy should be released on bail ahead of the trial, the date and place of which are yet to be set.
Lundy, who has been in prison for more than 12 years and seven months, was not present for today's hearing.
In his ruling, Justice Young said he was satisfied there was little or no risk of Lundy offending while on bail, interfering with witnesses or failing to turn up for trial.
He set bail conditions including that Lundy reside at an address, which he suppressed, and that he report to police once a week.
Justice Young also ordered Lundy not to contact any witnesses from the initial trial, and gave a stern warning that he would be returned to custody if he did so.
He did not impose any geographic limitations, which means Lundy is able to visit his home town of Palmerston North.
Lundy's nephew, Steven Jones, said outside of court that his family would be "ecstatic, over the moon'' with the decision.
"I came into it cautiously optimistic, but until they made the actual decision, I didn't really know what was going to happen.''
He said he it had been tough waiting for his uncle's release.
"But always supported him, never wavered, so I'm glad today's come.''
Mr Jones, the son of Lundy's sister Caryl Jones and her husband Dave Jones, said his uncle had been moved around various prisons.
"I've been to see him as often as I can, but it's been rough.''
He said it would mean a lot to Lundy to be able to visit his family's graves.
Lundy's lawyer, Felix Geiringer, made submissions in court on advice from the legal team that brought the appeal before the Privy Council in June.
The Crown was represented by prosecutor Ben Vanderkolk, who appeared by video-link from Palmerston North.
However, their submissions are suppressed under the Bail Act.
Speaking outside court, Mr Geiringer said his client's supporters had been hoping he would be granted bail.
"He's got bail, I'm sure they'd be happy. I'm very sure he's going to be happy.''
Mr Geiringer said relatives in court today had been in contact with Lundy.
He said it was not his place to comment on the bail conditions, but there was nothing objectionable in them.
Mr Geiringer said Lundy had not commented to him about the first thing he would like to do on bail.
He said he understood the intense public interest in his client's case, but he underlined the judge's "stern words'' about not discussing the case ahead of the retrial.
"Nobody wants anyone to interfere with that and interfere with the chance for a fair trial,'' he said.
"I don't want to upset the judge and do any harm to Mr Lundy's chances in front of the courts.''
In 2002, Lundy was convicted of murdering his wife Christine and 7-year-old daughter Amber and sentenced to a jail term of at least 20 years.
He appealed to the Privy Council, which on Monday unanimously ruled to allow the appeal.
It quashed his convictions and ruled Lundy should stand trial again on the murder charges as soon as possible and, until then, and subject to any High Court decision on bail, he should remain in custody.
A Corrections spokeswoman said the department could not disclose when Lundy would be released from prison for security reasons.
She said he would be free to leave once the prison manager had received a warrant for his release.
Lundy's next court date is set down for November 11 but his attendance has been excused.
