Bettel will resume his duties from Friday after leaving hospital "given the improvement of his health condition," according to the statement.
Bettel will work from home until the end of the week, when his isolation period will end.
On Tuesday a spokesperson for Bettel said the 48-year-old Prime Minister was in a "serious but stable" condition in hospital after he tested positive on June 27 following a European Union summit.
Bettel's symptoms had failed to improve over the weekend and he was hospitalized as a precaution. "At that time, insufficient oxygen saturation was diagnosed and the Prime Minister has been under continuous medical observation since then," the government said in a statement.
The PM was vaccinated on May 6 with the AstraZeneca vaccine. He was due to be vaccinated for a second time this week.
Luxembourg is one of Europe's smallest nations with a population of over 600,000.
The country has reported 71,748 cases and 819 deaths since the start of the pandemic, according to Johns Hopkins University data, and 37.8% of the population is fully vaccinated.