Pretoria magistrate Desmond Nair ruled Pistorius was not a flight risk and does not pose a danger to society following an emotionally charged hearing.
"I come to the conclusion that the accused has made a case to be released on bail," Nair said to cries of "yes!" from Pistorius's family and supporters.
"The issue is not guilt, but where the interests of justice lie," Nair said.
As the lengthy ruling was read the 26-year-old stood in the dock weeping and quivering.
The athlete was escorted to the holding area sobbing uncontrollably. He is expected to be released later on Friday.
His arrest on February 14 shocked the world and gripped South Africa, where he is still considered a national hero after becoming the first double amputee to compete in the Olympics.
Pistorius has since spent more than a week at a Pretoria police station charged with the premeditated Valentine's Day killing of Steenkamp, a model and law graduate.
If found guilty he faces a possible life sentence.
He denies the charge, saying that he shot 29-year-old Steenkamp repeatedly through a locked bathroom door in the dead of night by accident, having mistaken her for a burglar.
Steenkamp was found by medics in the early hours of Thursday last week at Pistorius's luxury Pretoria home covered in bloodied towels, with bullet wounds to her head, elbow and hip. She was pronounced dead on the scene.
His family were overjoyed at the magistrate's ruling, which his lawyer praised.
"I think it's a fair decision to grant bail," said Barry Roux.
Experts said the case would now be fast-tracked through the courts.
"This is probably going to get priority and will probably take about six months to go to trial," said Stephen Tuson, a criminal law professor at the University of Witwatersrand.
"It's a high profile matter."
It was not immediately clear where Pistorius would go, but he will not return to the Pretoria estate where Steenkamp was killed.
"He doesn't want to go back to the house," said Roux.