Additional District and Sessions Judge Nisar Ahmed granted bail to Ishaq as Punjab Police were unable to produce any incriminating evidence against him.
The court also directed authorities to free him from detention.
Ishaq's counsel also pointed out that police had arrested him under Section 295-A of Pakistan Penal Code, which is a bailable offence.
Ishaq, who has been linked to the murder of 70 Shias, was arrested on August 30 at Lahore airport on his return from Saudi Arabia, where he had gone to perform the 'Umra' pilgrimage.
He was remanded to judicial custody for 14 days the following day and sent to Kot Lakhpat Jail.
He was kept in a special cell in the prison after being declared a "high profile" accused.
Lahore Police had booked Ishaq for making hate speeches against Shias at Kamanah village on the outskirts of Lahore on August 9.
Ishaq had been released from Kot Lakhpat Jail in July last year after the Supreme Court granted him bail.
At the time, he had been in prison for 14 years.
After his release, attacks on Shias increased significantly and over 100 Shias were killed in attacks across the country.
The LeJ claimed responsibility for several of these brazen attacks.
While still in prison, Ishaq was accused of masterminding the 2009 attack on the Sri Lankan cricket team in Lahore that killed eight persons.
Ishaq was charged in 44 cases but convicted in only two, for which he received prison terms totalling six-and-half years.
He was acquitted in 34 cases and granted bail in seven others while one case was discharged.
Police have been accused of being soft on Ishaq as the LeJ's sister organisation, the Sipah-e-Sahaba Pakistan, is considered a close ally of the PML-N that rules Punjab.
Human Rights Watch has urged the Pakistan government to "urgently act" to protect the minority Shia community from sectarian attacks by Sunni militant groups that have killed at least 320 people this year.
Lahore: A Pakistani court on Monday granted bail to Malik Ishaq, the chief of the banned Lashkar-e- Jhangvi, for making hate speeches against Shias.
First Published: Monday, September 10, 2012, 20:56