Christian Klar assisted in deadly attacks in the 1970s and 1980s on leading German industrialists and public figures including Hanns Martin Schleyer and Juergen Ponto, Swiss news agency ATS reported.
Klar also took part in a raid on a bank in Zurich and shot at a police officer on the Swiss-German border before being sent to a German prison to serve a life sentence in 1985.
Announcing its decision, Switzerland's Federal Tribunal agreed with Klar's assertion that he had not been told about the ban when it was originally served in 1988, but only relayed to him shortly after his release from prison in 2009.
The tribunal also stated that Klar, now 60, no longer represented a security threat and said that the original ban should be reviewed by the Federal Office of Police since the attacks happened more than 30 years ago and he had served his sentence.
The extreme left Red Army Faction (RAF), also known as the Baader-Meinhof Gang after its founders Andreas Baader and Ulrike Meinhof, mounted a violent campaign against what it considered was the oppressive capitalist state of West Germany from 1977 to 1982.
It targeted the German elite and the US military based in Germany and is suspected of killing 34 people.
The kidnapping and murder in September 1977 of Schleyer, a former member of the Nazi party and the head of the German employers' federation, was arguably the group's highest-profile attack.
Schleyer was snatched from his car in Cologne in an attempt to blackmail the German government to release imprisoned Red Army Faction members.
His bodyguard, driver and two policemen were shot dead.
Klar was one of a second generation of RAF members who carried out the campaign of violence after Baader and Meinhof committed suicide following their capture in 1972.
The group officially disbanded in 1998.