"The release today is to make merit for the king's birthday," Prime Minister Thaksin Shinawatra said.
"Most of them are people who were detained because they couldn't afford to pay their fines."
Thailand celebrates the 78th birthday of King Bhumibol Adulyadej today. Thai Buddhists believe they can accumulate merit for their future life through virtuous deeds on special occasions.
The government used 40 million baht (US$970,000) from the lottery office to pay the fines, Thaksin said.
About 300 people from Bangkok and surrounding provinces were set free yesterday, and the remaining 700 were to be released in stages through Friday.
Each detainee also received 500 baht (US$12.50) for their transportation home - 200 baht from the Corrections Department and 300 baht from Thaksin personally.
Thaksin, one of Thailand's richest men, also gave 5,000 baht (US$125) from his wallet to a 19-year-old drug offender who was holding her baby boy, born while she was jailed.
Thailand's revered monarch told Prime Minister Thaksin Shinawatra on Sunday he should listen to critics instead of launching slander cases against them.
King Bhumibol Adulyadej, who turns 78 today, told thousands of birthday well-wishers led by Thaksin at his Bangkok palace that public figures should take criticism in their stride.
"If those being focused on feel criticized for what they believe they have done correctly and get upset, that is a loss," the king said in his annual birthday eve speech to the nation.
Thailand's constitutional monarchy has few formal powers, but the reverence with which the royal family is held means its rare comments on politics are highly influential.
He was alluding clearly to an anti-government campaign by Thaksin's friend-turn-foe Sondhi Limthongkul accusing the self-styled CEO leader of a litany of power abuses, including undermining the king.
Series of libel suits
Thaksin has pressed a series of libel suits claiming US$50 million from Sondhi as the bespectabled firebrand held weekly tirades against Thaksin, whose aides are considering accusing Sondhi of lese majeste.
But the king said Thaksin should not to waste his time and the country's energy to clear his name on television of every allegation made against him.
Thaksin is losing his lustre amid a string of corruption scandals and a persistent insurgency in the mainly Muslim south, where hundreds of people have been killed, just 10 months after winning a second landslide election.
Thai newspaper editors, who are setting up a fund to defend media defamation cases and campaign for reform of libel laws, accuse Thaksin of using costly defamation cases to gag his critics - charges he denies.
Thaksin usually seeks the king's advice privately on government affairs, including how to handle the insurgency.
Born on December 5, 1927 in the United States, the world's longest reigning king traditionally tackles social, political and economic issues during his birthday speech.
King Bhumibol, who is due to celebrates his 60th anniversary on the throne in June 2006, also urged the government to speed up development of alternative fuels as the world's fossil fuels were believed likely to be exhausted in 40 years.