Prosecutors ordered the release Wednesday of euro23 million ($33 million) seized from a Vatican Bank account last year in a money-laundering probe.
The Vatican welcomed the move and said the funds were ordered returned after the Holy See issued new anti-money laundering and anti-terror financing laws to conform with EU and international norms.
Italian financial police seized the money in September 2010 as a precaution and placed the bank's top two officials under investigation, alleging the bank broke the law by trying to transfer money without identifying the sender or recipient.
The Vatican denied wrongdoing and said the investigation of the bank, known as the Institute for Religious Works or IOR, resulted from a misunderstanding. The officials have not been charged.
The bank was created to manage assets placed in its care that are destined for the pope's religious or charitable works. It also manages ATMs inside Vatican City and the pension system for the Vatican's thousands of employees. It is not open to the general public, with some 40,000-45,000 accountholders belonging to religious congregations, clergy, Vatican officials and lay people with Vatican connections.
The Vatican newspaper L'Osservatore Romano quoted prosecutors Nello Rossi and Stefano Fava as saying that they had been able to verify "relevant" changes in the Holy See's institutional norms that had responded to the problems requiring the seizure in the first place.
On April 1, the Holy See's new anti-money laundering and anti-terrorist financing regulations went into effect, including the creation of a new financial watchdog agency.
The Financial Information Authority is tasked with ensuring all Vatican financial transactions are transparent and comply with the new laws. The watchdog will also share information with international financial organizations, a big shift for the notoriously private Vatican financial system.
It can freeze suspect transactions for up to five days and can conduct investigations which, if warranted, can be passed onto prosecutors at the Vatican tribunal.
Prosecutors said the Authority had already begun to cooperate with its Italian counterpart in "furnishing sufficient information about an operation between the IOR and Italian banking institutes that were object of attention and analysis because of its potential illegality," the ANSA news agency reported.
"This significant fact, together with the new norms, allows us to believe that the foreign state has installed a juridical regime with the criteria and rules that will prevent any repetition of IOR's omissions," ANSA quoted the document as saying.
Vatican spokesman the Rev. Federico Lombardi said the Holy See appreciated the move, saying it "confirms the correctness with which the IOR seeks to operate and the Holy See's serious commitment to comply fully with international standards to prevent illegality in the financial sphere."
Calls placed to prosecutors weren't returned Wednesday, the eve of a major national holiday.
In the 1980s, the IOR was involved in a major scandal that resulted in a banker, dubbed "God's Banker" because of his close ties to the Vatican, being found hanging from Blackfriars Bridge in London.