The one-year-old child, known as "Baby Asha" will be discharged within 24 hours, the Brisbane hospital caring for her said.
Her doctors initially refused to release her, fearing she would be deported to an offshore camp notorious for its poor conditions. She was admitted to Lady Cilento Children's Hospital after suffering serious burns while under government detention on Nauru.
"The [immigration] department further advised that there is no imminent plan for the family to return to Nauru and the family's case is under consideration," a hospital statement said.
The decision to let her stay marks a significant reversal said Australian Human Rights Law Centre's Director of Legal Advocacy, Daniel Webb, who has been working on the case.
"A week ago we had to file an urgent case in the highest court in the country to stop the government from secretively deporting this baby to Nauru. Now the family is being released into the community. It's a massive turnaround," Webb said.
Although "Baby Asha" supporters welcomed the concession, it does not rule out the possibility that she may be transferred back at a later date. Australian Immigration Minister Peter Dutton said that the family's asylum claim is still to be decided.
A #LetThemStay protest outside the hospital.
"The government's position is perfectly clear and that is at some point if people don't have a protection claim then they will be returned to their country of origin or back to Nauru. We are not going to renege on that position," Dutton said.
Local advocacy group Refugee Action Collective Queensland also highlighted that 267 more refugees are facing deportation to Nauru including victims of sexual abuse and other infants.
"The family and the doctors are happy with this outcome, but the threat of return to Nauru remains, as it does for the other 267 people." it said.
Offshore Australian detention centers on Manus Island in Papua New Guinea and the island of Nauru hold around 1,500 people, with the average length of stay 445 days.
"State-sanctioned form of child abuse"
Australian Medical Association president Brian Owler on Sunday urged the government to release all children from both offshore and onshore detention centers slamming the camps as a "state-sanctioned form of child abuse."
Owler also called on the government to empower a body of independent clinical experts to investigate and report to parliament on the welfare of refugees, and said the lack of transparency surrounding the camps was especially concerning.
Read: Border Force Act entrenches secrecy around Australia's asylum seeker regime
"The dehumanization of the asylum seekers by Minister Dutton and others referring to these people as 'illegals', combined with cloaking them in secrecy in offshore processing, has made it more difficult for the Australian public to identify with these people," Owler said.
"Somehow, these asylum seekers seem less worthy. The Syrian asylum seekers that we can see arriving in Europe or waiting in Turkish refugee camps seem more human and in need of help."
Journalists are not allowed into the detention centers. CNN spoke to children in detainment via phone and Skype who described bleak, prison-like conditions. Under a bill that came into force last July, doctors and aid workers who speak out about center conditions without the approval of the government can be jailed for two years.
