James' father, Ralph, who last year threatened to find the teenagers and exact revenge, said in a statement from his lawyers that he felt "angry, frustrated and completely let down by the system."
A Cabinet member announcing a parole decision is extremely rare, but few cases in Britain have aroused such intense public interest.
Venables and Thompson lured James from a shopping center in Bootle, near Liverpool, as he waited outside a butcher shop for his mother. A video camera captured images of the toddler being led away by the two older boys, and those scenes have been replayed countless times on British television.
The boys dragged and led the 2-year-old two miles through town to a railway line, where they hit him with bricks and metal bars, poured paint in his eyes and finally placed him on the tracks, where a train cut him in half.
The decision to release Venables and Thompson came less than two months before they faced likely transfer to an adult prison, a move a judge warned would be harmful for their rehabilitation.
The pair have spent eight years in a secure children's unit after being found guilty of abducting and murdering James in February 1993.
A three-member parole board, consisting of a judge, a psychiatrist and an independent member, considered the teenagers' cases separately this week. The panel questioned the young men, studied psychiatric reports, considered statements from criminologists and doctors, and reviewed school records.
As a condition of their release, Venables and Thompson are not permitted to contact each other or any member of James' family. They are also not allowed to enter the Liverpool area without the approval of probation officials.
And for the rest of their lives, the pair "are liable to be recalled to custody at any time if there is any evidence that they present a risk to the public," Blunkett wrote.
The murder shocked the nation, and the release of the teenagers has divided public opinion.
Venables and Thompson were initially sentenced to a minimum of eight years for the crime, described by the trial judge as an act of "unparalleled evil and barbarity."
The sentence was later increased to 15 years by former Home Secretary Michael Howard. But in October a judge restored the original sentence, saying it would not be beneficial for the two to be in the "corrosive atmosphere of an adult prison."
The reduction was prompted by a 1999 European Court of Human Rights ruling on an appeal from the teenagers. The court said it was wrong for a politician to be involved in setting sentences for juveniles.
[b]It also said Britain had violated the killers' rights to a fair hearing by trying them in an adult court.[/b]
Both teenagers came from poor families. Since their confinement, they have gained academic qualifications and taken part in activities ranging from [b]theater trips to white-water rafting.[/b]
The lawyer representing Thompson said his client "has changed as a person."
"He has accepted responsibility for his part, he has shown great and real remorse over a long period of time in a genuine way," lawyer Dominic Lloyd said.
The release of the killers is likely to spark a frenzy among Britain's tabloid newspapers to hunt them down even though a High Court injunction bans publication of their photos or their whereabouts for the rest of their lives.