Saajid Badat's release will only add to security fears at the high-profile event in London, which opens on July 27.
The 32-year-old was jailed for 13 years in 2005 after conspiring with two other radical Muslims to blow up a passenger jet - but he will be released after serving just eight years and eight months.
Tense atmosphere: Saajid Badat's release just hours before the Games start will only add to security fears
The religious teacher from Gloucester admitted to conspiring with Brit Richard Reid and Belgian terrorist Nizar Trabelsi to blow up flights to the U.S. in 2001.
But now he is due to be freed two-thirds of the way through his sentence on the official opening day of the biggest sporting event in the world, according to the Daily Mirror.
'People are furious this guy is being released on that day but it’s just a quirk of fate,' said a security source.
'You can be sure people will be watching him very carefully and taking note of who he associated with in prison.'
Extremists: Badat's co-conspirator Richard Reid is in prison in America after trying to ignite a shoe bomb on board a U.S.-bound jet
Badat is believed to have been trained for the plot by al-Qaeda in Pakistan and Afghanistan.
He was arrested when he was found with a bomb designed to be placed in his shoes in order to evade airport security.
He had even booked a ticket for a flight from Amsterdam to the U.S., but he had a last-minute change of heart and never boarded the plane.
His fellow plotter Reid was overpowered by fellow passengers on a flight from Paris to Miami while trying to detonate the bomb in his shoes, and is now serving a life sentence in America.
The extremists were linked through phone cards found on Reid used to contact Trabelsi, who is serving time in Belgium.