Nazanin Zaghari-Ratcliffe, a project manager with the Thomson Reuters Foundation, has been let out of jail for three days, according to her husband Richard Ratcliffe.
British Foreign Secretary Jeremy Hunt welcomed her temporary release and called on Iranian authorities "to capitalise on the goodwill from today's announcement by going the whole way and releasing Nazanin and allowing her to go back to her family and come back to the United Kingdom".
"But it didn't - she is outside those prison walls".
The temporary release was meant to allow her to see her family, particularly her daughter, the ambassador said.
She then called her husband and the British embassy and traveled to join the rest of her Iranian family in Damavand.
A gaffe by Hunt's predecessor, Boris Johnson, in the British parliament in September led Iranian authorities to claim he had confirmed that Zaghari-Ratcliffe - who was on holiday in Iran to introduce her baby daughter to her parents - had trained journalists while in the country.
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The British-Iranian dual national, from Hampstead, north London, is serving a five-year sentence over allegations, which she denies, of plotting to overthrow the Tehran government.
Hunt's predecessor Boris Johnson attracted criticism for appearing to jeopardise Zaghari-Ratcliffe's case past year when he suggested at a parliamentary hearing in November 2017 she had been training journalists in Iran prior to her arrest.
In an unusual move, Iran's ambassador to London, Hamid Baeidinejad, posted a tweet on the release, offering a link to the image of mother and child.
"It's extremely positive and we want to thank the Iranian authorities for what they're doing whilst not forgetting that she should not be in prison in the first place", he said. It remains unclear if that threatened charge remains in play.
There is little information about the events leading up to Mrs Zaghari-Ratcliffe's temporary release but it comes as the British Government is considering repaying Tehran £400 million from a pre-1979 arms deal.
"I felt so overwhelmed", she was quoted as saying in the statement released by The Free Nazanin campaign, which is run by her husband.