Lawyers for Kalejs, 87, immediately appealed the ruling handed down in a Melbourne court. A hearing date for the appeal has not yet been set.
Kalejs was in police custody for about two hours before he was granted bail. Under the bail terms, Kalejs surrendered his passport and was ordered to remain in a Latvian nursing home in Melbourne.
Members of Latvia's Jewish community say his lawyers' claims that Kalejs, who has steadfastly maintained his innocence, is too old and sick to stand trial are irrelevant.
"I don't think age and health in this situation should be a reason for him not to stand trial," said Gregorys Krupnikovs, chairman of the Riga Jewish Community.
Kalejs' attorneys presented documents during the trial that the alleged officer in the notorious death squad the Arajs Kommando was suffering from dementia and "cognitive impairment" and could not follow the hearing much less recall events from 60 years ago.
Kalejs also reportedly suffers from cancer and is nearly blind and deaf. When he attended the two-week hearing he often appeared in a wheelchair accompanied by a nurse.
"Most significantly he cannot follow what is happening. He cannot remember the past. It is therefore impossible for him to get a fair trial," attorney Gerard Lethbridge said in a statement.
Latvia leveled genocide charges against Kalejs in December based on allegations that he was a commander at the Salaspils labor camp near Riga and was linked to the deaths of 290 Jews sent to the camp.
Prosecutors here said they are still wrapping up a pre-trial investigation and hope to question Kalejs if he returns to Latvia.
Kalejs' lawyers argued that the case against him in Latvia was insufficient and that the Latvian government was bowing to international pressure to try him, charges that magistrate Lisa Hannan shrugged off in her ruling, according to reports.
Hannan was not to rule on Kalejs' guilt or innocence but on whether his alleged crimes at Salaspils would amount to crimes under Australian law.
Latvian prosecutors have been tightlipped about the evidence against Kalejs, but it likely includes mostly documents and few if any witnesses.
They have assembled the documents with the help of law enforcement authorities from Australia, Canada, Great Britain and the United States, according to the prosecutor general's office.
Eli Rosenbaum, head of the U.S. Office of Special Investigations, said in a recent interview that it is not uncommon to base World War II crimes solely on documentary evidence.
"For years these cases have been successfully built on documents," he said. "There are very few cases where survivors implicate individuals in Nazi crimes."
Rosenbaum led a United States investigation in the 1980s that led to the deportation of Kalejs for failing to inform immigration authorities there of his war record.
He has turned over much of that evidence to the Latvian authorities.
Kalejs fled Latvia following the war, settling first in Denmark in 1945 and then in Australia, where he obtained citizenship in 1957.
He moved to the United States in 1959 and became a successful real estate developer, according to U.S. court documents.
The United States Justice Department began investigating him in 1984 and he was deported to Australia in 1994.
The following year he left Australia for Canada but was deported from there in 1997 after he was linked by a Canadian tribunal to the Arajs Kommando.
He was discovered living in a British nursing home last year and fled again to Australia.
Despite the lack of a ratified extradition treaty between Australia and Latvia, prosecutors here applied for his extradition last December.
The Latvian Parliament has yet to ratify the extradition treaty and some MPs said they refuse to be forced to do so by international pressure.
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