She has been released for two weeks but must wear an ankle monitor as a condition of her release and cannot be more than 300m away from her parents' home.
Ms Zaghari-Ratcliffe was arrested at Tehran’s Imam Khomeini airport while travelling with her young daughter, Gabriella, to meet her parents in April 2016.
She was sentenced to five years in prison over allegations of plotting to overthrow the Tehran government.
She had been afforded diplomatic protection by the UK Government, which states she is innocent and that her treatment by Iran failed to meet obligations under international law.
Foreign Secretary Dominic Raab said he was "relieved" she had been temporarily released.
In a statement he said: “I am relieved that Mrs Zaghari-Ratcliffe was today temporarily released into the care of her family in Iran.
"We urge the regime to ensure she receives any necessary medical care.
"While this is a welcome step, we urge the government now to release all UK dual nationals arbitrarily detained in Iran, and enable them to return to their families in the UK."
Labour's Hampstead and Kilburn MP Tulip Siddiq said the release is "good news in the darkness of the coronavirus" outbreak.
The Labour MP said on Twitter she is both "pleased and relieved rather than in jail at this time of terrible chaos".
Tehran reported another 129 fatalities on Monday, the largest one-day rise since it began battling the Middle East's worst outbreak, which has claimed more than 850 lives and infected a number of senior officials in the country.
Businesses in the capital remained open even as other countries in the region moved towards full lockdowns.
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It is thought in some circles Ms Zaghari-Ratcliffe is being held as a bargaining chip to try and hasten the resolution of a £400 million dispute between the UK and Iran over a deal for Chieftain tanks struck in the 1970s.
The row rose over a deal between International Military Services, a venture used by the Ministry of Defence to sell British weapons overseas, and the Iranian defence ministry to sell the Shah of Iran around 1,500 Chieftain tanks and armoured vehicles in 1971.
The contract was terminated after the Shah was deposed in the 1979 revolution, but Iran had already paid for the tanks and demanded its money back.
There are hopes Ms Zaghari-Ratcliffe could be permanently released if the financial dispute can finally be settled.