A Pakistani court has freed on bail the alleged mastermind of a 2008 assault on India's financial capital Mumbai that killed 166 people and seriously strained ties between the neighbouring countries.

Zaki-ur-Rehman Lakhvi was released late on Thursday, according to an official at Adiyala Prison in Rawalpindi, next to Islamabad.

The move swiftly drew furious condemnation from India, which slammed the release as an "insult" to the victims of the three-day onslaught on its financial capital, blamed on the banned Pakistani militant group Lashkar-e-Taiba (LeT).

Lakhvi's release has also been condemned by the US, which says it is considering what steps to take next to encourage Pakistan to bring the suspected "terrorists" to justice, according to US State Department spokesman Jeff Rathke.

Lakhvi is one of seven men facing trial over the attacks, in which ten gunmen infiltrated the city by boat and spent three days spraying bullets and throwing grenades around city landmarks.

India blamed the Pakistan-based armed group Lashkar-e-Taiba for the Mumbai attack.

Indian investigators said Lakhvi was the Lashkar-e-Taiba military chief. He was arrested in Pakistan in 2009 in connection with the attack.

Relations between India and Pakistan, which have fought three wars since independence in 1947, plunged after the assault and have not fully recovered. A dispute over the Kashmir region periodically flares into violence.

Lakhvi was granted bail by an Anti-Terrorism Court in Islamabad on December 18, two days after an attack on a high school in the city of Peshawar killed 132 children.

The fact that he was granted bail just two days after the attack, for which many are still in mourning, forced the government to detain Lakhvi under "Maintenance of Public Order" legislation.