"The Audiencia National has denied the extradition of General Hugo Armando Carvajal," said Spain's top criminal court, which handles such requests.
The judges decided to release Carvajal, who served as head of military intelligence under the late Venezuelan leader Hugo Chavez and has been held in provisional detention since his arrest in Madrid in mid-April, Presstv Reported.
Details of the full judgment will not be published until Tuesday, said the court, which examined the case last week.
"We are very satisfied but out of prudence, we are not going to comment on the decision until we have the full judgment," Carvajal's lawyer Maria Dolores de Arguelles told AFP by telephone.
"We only have the judgment on his release and I am personally going to the Estremera prison to tell him," she said, indicating that he would be released from the facility on the outskirts of Madrid later in the day.
Known as "El Pollo" (the Chicken), Carvajal was stripped of his rank after coming out in support of Juan Guaido as Venezuela's acting president in February.
He then fled by boat to the Dominican Republic before relocating to Spain where he was arrested in April.
Carvajal has long been sought by US Treasury officials who suspect him of providing support to drug trafficking by the FARC guerrilla group in Colombia.
In an indictment filed in New York in 2011, Carvajal was accused of coordinating the transport of more than 5.6 tonnes of cocaine from Venezuela to Mexico in 2006 that was ultimately destined for the United States.
If convicted, Carvajal could face between 10 years to life in prison, the US Justice Department said in April following his arrest.
Carvajal has denied any "links to drug trafficking and the FARC", Spanish judicial sources said at the time.