The decision came as a surprise to many, including Siti Aisyah herself, and kicked off a dramatic day at the Shah Alam High Court.
Aisyah hugged her co-defendant, Doan Thi Huong of Vietnam, before leaving the courtroom. She later tearfully told reporters that she was "shocked" to have been freed after more than two years behind bars.
Aisyah is expected to depart for her home country later in the day, her lawyer Gooi Soon Seng said, adding prosecutors had given no reason for their decision.
The prosecutors did not ask the judge to drop charges against Huong, a decision her lawyer criticized as "unfair."
The trial is due to resume Thursday, when prosecutors are expected to announce whether they will continue with the case against Huong.
Aisyah and Huong were charged with murdering Kim Jong Nam shortly after his death in February 2017, and faced the death penalty if convicted. Authorities say they exposed Kim to the nerve agent VX as he entered Kuala Lumpur International Airport, killing him in minutes.
Security footage shows a woman approaching him from behind, rubbing something on his face and then running away.
Lawyers for the two women have said they were duped by a team of North Korean agents, who tricked them into thinking they were taking part in a reality TV show.
Rusdi Kirana, Indonesia's ambassador to Malaysia, said the decision to drop the case against Aisyah followed months of lobbying by Jakarta. The Indonesian Law and Human Rights Ministry released an image of an undated letter in which it requested that Aisyah be freed.
The letter repeated many of the arguments made by her defense attorneys. It also asked that Malaysian authorities take into account the two countries' "good relations" when considering the request.
Malaysian Attorney General Tommy Thomas responded with his own letter Friday, announcing that the prosecution would effectively drop the case. Copies of both letters were released by Indonesian authorities and a spokesman for Thomas confirmed their validity.
Four North Koreans have also been charged with Kim's killing. Their whereabouts are unknown, and Interpol has put out red notices for each of them, asking governments around the world to send them to Malaysia to face trial.
It's unclear why Kim Jong Nam was killed, but analysts said Kim Jong Un may have seen him as a potential threat. Jong Nam fell out of favor with their father, former North Korean leader Kim Jong Il, nearly two decades ago and lived in self-imposed exile in the Chinese-controlled territory of Macau.
North Korea has consistently denied involvement in the killing, though United States, South Korean and Malaysian authorities have said it was in fact responsible for Kim's death.
Monday was the first time Huong and Aisyah had spoken publicly in the more than two years they spent behind bars.
But Huong ended up only reading the first three lines of her prepared testimony in a tearful and stuttering tone.
Defence lawyer Hisyam Teh Poh Teik said she "was traumatized by the unfair decision" not to drop charges in her case, and her legal team had made a decision to stop the testimony.
"Doan (Huong) was obviously disappointed," Teh told reporters. "She was in no position to testify." He said his team would request the withdrawal of the charge against her.
'Happy and so relieved'
Speaking later at the Indonesian embassy in Kuala Lumpur, Aisyah thanked her lawyers, Indonesian authorities and the Malaysian government for securing her release. "I did not expect that today will be the day of my freedom," she said.
Aisyah is expected to return home later Monday on the ambassador's private jet.
Indonesia's Foreign Ministry brought Aisyah's parents to Jakarta, where they are expected to meet their daughter when she arrives, her mother Benah told CNN.
Benah said she was "happy and so relieved" that her daughter has been freed.
"Since the very beginning we believe that she is not guilty. Siti is innocent. That's why we keep praying for her," she said.
Benah said she is unaware of what will happen next, but plans to "make sure that Siti will only work at home."
Diplomatic tensions
Kim Jong Nam's murder triggered a heated three-week diplomatic row between Malaysia and North Korea, further isolating Pyongyang. Kim Jong Un was viewed by many at the time as a calculating and ruthless leader shrouded in mystery. It would be more than a year before his much publicized meetings with the leaders of South Korea, China and the United States.
The diplomatic dispute ended after nine Malaysians effectively barred from leaving Pyongyang were allowed to return home and three North Koreans were permitted to leave Malaysia.
It's unclear if Huong's detention has caused any friction between North Korea and Vietnam, one of the relatively few countries to maintain diplomatic relations with Pyongyang.
Huong's case did not appear to be publicly discussed during Kim Jong Un's recent visit to Hanoi, when he met US President Donald Trump and Vietnam's leaders.
In an interview last month, Vietnamese Prime Minister Nguyen Xuan Phuc appeared to play down tensions between his country and Pyongyang over the incident.
"This is an issue of the law. We also care about protecting the rights of our citizens, but both countries will discuss this specifically at a later time, not during this period," he said.
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