However, Josef Fritzl will remain where he is while an appeal by prosecutors is under consideration.
Fritzl's crime was revealed in 2008.
He was sentenced in 2009 to life imprisonment for incest, rape, coercion, false imprisonment, enslavement and for the negligent homicide of one of his infant sons.
A three-judge state court panel ruled that he now should be moved from psychiatric detention on the basis of a new assessment, court spokesman Ferdinand Schuster told the Austria Press Agency on Wednesday.
The panel at the state court in Krems set a 10-year probation period and other conditions.
Prosecutors appealed, sending the case to a higher court in Vienna.
Fritzl, 87, will remain in a psychiatric facility while that court considers the appeal.
A previous decision to move Fritzl to a normal prison, based on a psychiatric assessment that he no longer posed a danger, was issued in Krems in September and overturned on appeal.
The higher court sent the case back to Krems in November, arguing that the state court provided insufficient reasoning for its decision.
The Krems court is legally obliged to review regularly whether holding Fritzl in a psychiatric facility remains justified.
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