Palma Samamanca, 48, was picked up on a Paris street on Thursday and placed in detention on the basis of an international arrest warrant issued by Chile.
The court on Saturday informed him that he was likely to be the subject of an extradition request but freed him from detention, while banning him from leaving France and ordering him to report to a Paris police station every day, according to Spain's EFE news agency.
Chilean Foreign Affairs Minister Heraldo Munoz confirmed the arrest on Friday, having interrupted a holiday to contact the French authorities.
In 1992 Palma Salamanca was given two life sentences for the kidnapping of Cristian Edwards, the son of the deceased owner of El Mercurio newspaper, Agustin Edwards, and the killing of Jaime Guzman, an academic and right-wing politician who was a key adviser to Pinochet.
Palma Salamanca was a member of the Manuel Rodriguez Patriotic Front (FPMR), an amred group formed by the Chilean Communist Party, which was banned under Pinochet.
In 1996 he and three other FPMR members escaped from a maximum security prison by helicopter.
The escape is believed to have been orchestrated by Raúl Escobar Poblete, also known as "el Comandante Emilio", who was his accomplice in the Guzman killing.
Detained but released in December
Palma Salamanca has been on the run ever since and is believed to have fled Mexico after Escobar Poblete was arrested there in May last year, going to Cuba and then France
According to Chilean Supreme Court judge Mario Carroza, he was detained in France last December but released.
Carroza welcomed his arrest, as did Chile's Independent Democratic Union (UDI), which was founded by Guzman.
Its present leader, Juan Antonio Coloma, told Chilean media that Munoz will visit France next week in the hope of speeding up extradition.
French courts will consider the demand in March.
French national Marie-Emmanuelle Verhoeven spent 16 months in jail in India awaiting extradition for alleged involvement in the Guzman killing in 2016-17.
She returned to France last July after the extradition proceedings were abandoned.