But federal prosecutors have appealed the decision, meaning Joseph Saadieh will remain in custody until at least next Friday.

The 24-year-old Western Sydney University student is accused of intentionally being a member of the IS terrorist organisation between 2018 and his arrest in June 2021.

Police allege his membership is borne out through alleged possession of IS beheading videos on his phone, other extremist material and a pledge of allegiance to an undefined entity in October 2018.

Saadieh also allegedly called a convicted advocate of terrorism a "good friend" and received letters from ISIS member Isaac el Matari and another man, anticipating the student would soon join them in Goulburn's Supermax prison.

El Matari is awaiting sentencing for planning for a terrorist act in Australia on behalf of IS, naming the American embassy and St Mary's Cathedral as possible targets.

Saadieh will likely dispute the charge against him, NSW Supreme Court Justice Peter Hamill said.

The judge noted the southwestern Sydney man had been surveilled since 2018, with an "overwhelming" body of evidence suggesting he is, or was at times, a supporter of IS's actions.

Material found on his phone allegedly includes instructions for bomb making while the graphic nature of some other chilling content "may betray an indifference to human suffering", the judge said.

But the evidence didn't rise to a level suggesting Saadieh was plotting an attack or collecting materials and prosecutors could face difficulty proving Saadieh was a member of Islamic State.

"Sympathy for the ISIS cause does not constitute membership," Justice Hamill said.

Material before the court suggested the man had denounced the terror group to a psychologist and distributed pamphlets in Sydney stating Islam was "not a religion of extremism" and was for "peace, forgiveness and mercy".

An expert also suggested recent Instagram posts, read in context, "paint a very different picture than that alluded to in the (police) statement of facts".

Justice Hamill found exceptional circumstances to warrant the student's release on bail, noting expert opinion differed about to whom Saadieh made his pledge or "bay'ah".

The judge also considered the 20 months between that pledge and his arrest, the fact Saadieh sought psychological treatment before his arrest, and the onerous conditions he faced in custody due to the pandemic.

The risk of Saadieh fleeing NSW, committing a serious crime or harming the community - as articulated by the Crown - could be mitigated with 22 conditions, the judge said.

Those include house arrest, a $40,000 cash surety and a ban on Saadieh accessing the internet, using an internet-capable phone, contacting any of 34 named people or having a door or window lock in his bedroom.

He must also be in the company of a parent when he reports daily to police, attends legal appointments or attends deradicalisation treatment with a psychologist.

The Court of Appeal will hear the prosecutor's appeal next Friday.

Australian Associated Press