Los Angeles Superior Court Judge Elden Fox ordered the actress to undergo addiction counseling and psychotherapy sessions multiple times a week until November.
Under Fox's modification of the starlet's sentence, Lohan will also be required to take frequent drug tests. Also, the actress will be required to live in Los Angeles.
Fox said he ordered Lohan's release from her rehabilitation program at 5 p.m. on Tuesday. The actress was released around 8 p.m., following only 23 days of a three-month requirement at Ronald Reagan UCLA Medical Center.
The troubled star was released after doctors determined that her problems were not as severe as first thought.
"They started fresh with their own fresh evaluation, put her through their own testing, made their own diagnoses and recognized there was no need for her to be there any longer," said Lohan's attorney, Shawn Chapman Holley.
Holley said Lohan is ready for the intense lineup of outpatient sessions the 24-year-old faces.
"She has changed. She is ready, she's clear-headed, she is positive and looking forward," Holley said.
The judge's ruling to free Lohan from inpatient rehab will allow the actress to work again. Her latest project is a movie about porn star Linda Lovelace. Lohan will be playing Lovelace.
Lohan entered the rehab program on Aug. 2 after spending 13 days of a 90-day jail sentence for violating the terms of her probation in a 2007 drug case.
Her shortened jail stint was attributed to jail overcrowding.
At a hearing on in Beverly Hills on Wednesday, Fox gave Lohan more incentives and rewards. He dismissed Lohan's two 2007 drug counts. The judge also said she will remain under supervised probation until November.
The judge made it very clear that if Lohan fails or does not comply with the drug tests, the actress may find herself back in jail.
The Associated Press contributed to this report.