Magistrate Desmond Nair told a court in Pretoria that the prosecution had failed to establish any of the factors that would have caused him to deny bail.
Nair said the state had not made a strong enough case that the Paralympian was prone to violence or that his release on bail would provoke public outratge.
He added that he the prosecution's case was not so strong that Pistorius would feel compelled to flee South Africa, so he did not consider him a flight risk.
The magistrate said the athlete's detailed affidavit was a factor in his release, but said there were flaws in the athlete's version of events.
Nair said he "had difficulty" with issues such as why Pistorius failed to establish Steenkamp's whereabouts, why she did not shout back from the toilet where she was shot, and why Pistorius ran towards where he believed the danger to be if, as he stated, he felt vulnerable.
The decision came at the end of a tense summing-up by Nair that stretched over 100 minutes.
HOW THE DECISION WAS DELIVERED
Bail has been set at one million South African rand (£74,000). Pistorius will stay at an undisclosed address, must hand in his passport, surrender his firearms and report to Brooklyn Police Station in Pretoria every Monday and Friday.
Oscar Pistorius's next court appearance is set for June 4th, 2013.
OSCAR PISTORIUS GRANTED BAIL
Magistrate Desmond Nair concludes he has made a strong enough case, citing Pistorius's detailed account in his version of events. The prosecution failed to establish any of the factors that would have led to Nair refusing bail.
Shouts of 'Yes!' from Pistorius's friends and family greet the ruling.
Nair calls a brief adjournment - we await bail conditions.
Nair: If releasing Oscar Pistorius on bail would cause public outrage, the state should have made the case to me.
Nair cites case law in establishing what needs to be established to grant bail.
Nair: Oscar Pistorius's propensity to violence not established. State's case showed he had "aggressive tendencies" but did not dig deep enough.
Nair: I cannot find is has been established that the accused is a flight risk.
Nair now looks at whether Pistorius would be likely to flee. He runs through his assets and connections in South Africa.
Pistorius cries quietly.
Nair: The defence has failed to show exceptional circumstances.
However, the prosecution has not shown its case to be so strong that the defendant would feel the need to flee.
Nair now highlights things he "has difficulty in understanding" in the defence's case. Why did Reeva Steenkamp not shout out from the toilet? Why did he not know she was not in bed? Why did he walk towards the danger if he thought an intruder was in the bathroom?
Nair says it is "practically impossible" for the state to assemble "all the pieces of the puzzle" within a week.
Nair says Hilton Botha's evidence is not the same as the state's case - the defects in his evidence do not necessarily mean the state's case is weak. Evidence is circumstantial - only the accused knows what happened.
Nair now rounds on Botha's "astounding perception of distance", saying a witness was 600m from Pistorius's house before revising his estimate to 300m.
Nair runs through investigator Hilton Botha's errors, starting with his failure to collect and investigate the mobile phones found at Pistorius's apartment.
Botha also may have contaminated the crime scene by not wearing protective shoes. He did not do enough to investigate other incidents that may have indicated a propensity for violence.
Nair: Botha "blundered" by testifying that he found testosterone, before quickly retracting the statement.
Nair says Botha did not take a memory stick apparently showing offshore accounts - a factor in assessing flight risk.
Botha has now been removed from the case.
Nair runs through the factors that might cause him to deny an applicant bail - money, the violence implicit in the charge and flight risk.
Nair is back, and he has resumed speaking.
The court will adjourn for "five minutes" - Nair has spent an hour summarising the last few days' proceedings.
Nair says he is not interested in establishing Oscar Pistorius's guilt in terms of premeditated murder; merely in determining whether there is enough evidence (even circumstantial) for a case of premeditated murder to he heard.
He says he is satisfied for this to remain a schedule six charge.
Nair says case law regarding bail is too numerous to mention. But will he have a go anyway?
Magistrate Desmond Nair now defines bail, referring to "early Roman-Dutch law". Agony for those awaiting the bail decision inside the Pretoria courtroom.
Nair is still reviewing the prosecution's case, as three court artists sketch pictures of Oscar Pistorius.
Nair continues his summary of Hilton Botha's evidence. No sign of an imminent decision on the bail application.
Nair has finished recapping the evidence for Oscar Pistorius - he will move on to the prosecution now, starting with police detective Hilton Botha.
Nair is now reviewing statements by Pistorius's friends. This could take a while.
Pistorius is shaking and sobbing as Nair continues to speak.
Nair is recapping the defence's case, including Pistorius's affidavit. It is very hot in the courtroom and Nair keeps wiping his brow.
Nair says there was no special treatment of Pistorius despite him being held in a police cell rather than prison during the bail application.
Nair is explaining the reasoning behind his ruling that this is a schedule six offence (premeditated murder), and recapping the bail hearing.
Nair is continuing to explain the whys and wherefores of his decision not to allow the bail hearing to be televised.
Nair has entered the court and has started giving his ruling.
Nair is explaining why he has not allowed TV cameras to record court proceedings.
The court is filling up ahead of Nair's decision whether to grant bail to Oscar Pistorius ahead of his trial for the murder of Reeva Steenkamp.
Two members of Steenkamp's family are present.
Defence lawyer Barry Roux says if he were prosecuting he would argue for culpable homicide, not murder, and refutes that his client is a flight risk on the basis that every time he goes through airport security, it causes a commotion. He added: "It is impossible for Oscar Pistorius to disappear. His legs need constant maintenance and needs medical attention for his stomach."
Roux finishes and magistrate Desmond Nair, adjourning the session, announces that he expects to announce a decision at 12.30pm UK time (2.30pm local). Pistorius looks exhausted and emotional.
Prosecutor Gerrie Nel says Pistorius should not get bail just because he is famous. He is then visibly annoyed after magistrate Nair says: "But ducking and diving every day, with those prosthetic legs?"
Nel replies: "Yes", to laughter from the gallery. Nair then asks: "What kind of life would Pistorius lead if he flees? Given his prostheses?" Nel replies: "A life of freedom. A life not in prison."
Pistorius arrives in court moments after his dad Henke. Photographers are asked to leave.
Roux takes Pistorius's hand and tells him: "You're going to be okay." Pistorius replies: "Thank you, sir."
Pretoria Magistrates Court starts to fill ahead of the final day of Oscar Pistorius's bail hearing ahead of his trial for the alleged murder of his girlfriend Reeva Steenkamp.
Some members of the Pistorius family arrive in court - his brother, sister and uncle - followed by defence advocates Barry Roux and Kenny Oldwage.
The prosecution team follows 10 minutes later.