The developments happened in the Kurunegala court on Thursday when state attorney acknowledged that there was no evidence to hold against Mohamed Shafi; but Buddhist monks and other groups opposed the release saying it could lead to violence.
The doctor was arrested on allegations that he sterilized some 4,000 Sinhala Buddhist women against their wishes.
The Criminal Investigations Department in a 210-page report made it clear to the magistrate that the allegations were false and that there is a police official involved in a massive fabrication of evidence to frame Dr. Shafi.
The doctor was arrested on May 24 after allegations in wake of Easter Sunday attacks which killed over 250 people.
The doctor has filed a fundamental rights petition in Supreme Court challenging his arrest.