Tymoshenko, now using a wheelchair, has become the international face of democratic opposition to the dictatorial rule of President Yanukovych, who parliament yesterday voted to remove from office.
Tymoshenko, 53, told the crowd: "Don't stop yet." She will stand in fresh presidential election to be held in May.
"Until you finish this job and until we travel all the way, nobody has the right to leave," she said. "Because nobody could do it - not other countries, nobody - could do what you have done. We've eliminated this cancer, this tumour."
She had been jailed for alleged abuse of power in 2011 by the Yanukovych regime, and went on hunger strike in jail.
After her release last night she told crowds in Independence Square: "Our homeland will from today on be able to see the sun and sky as a dictatorship has ended."
She vowed those responsible for violence towards protestors would be punished. Independence Square has been the centre of protest and has seen many deaths in bloody street battles in recent weeks.
The European Union demanded her release from prison as one of the conditions of the EU-Ukraine trade pact that Yanukovych rejected last year - triggering the protests which led to the current crisis.
On her way to Independence Square in a security-guard flanked car she waved to supporters who lined the streets. The now-frail woman leaned out from behind the vehicle's black curtains to touch their hands. Before her detention, her glamorous looks and fiery oratory made her a darling of the western media.
Thousands gathered in the square to celebrate her release, many holding candles as they waited in the cold. While the vast majority of the crowd cheered her, not all were delighted to see her at the epicentre of the protest movement.
A few dozen walked away when she appeared. Some blame her for the chaos that followed the pro-democracy Orange Revolution in 2004, and see her as a member of the corrupt Ukrainian elite
Tymoshenko's release was met with fireworks, singing and speeches long into the night, marking a hoped-for new start for Ukraine. She appeared relieved but emotional as she addressed the crowds, many of whom had been waiting for hours.
Setting herself on an immediate collision course with Moscow and President Putin, she said she was "sure" Ukraine will now join the European Union.
She added: "We must make sure no drop of blood was shed in vain, that no drop of blood is forgotten, and that every person in our country has the life that they gave their lives for, that we - and everyone with honor, dignity and conscience - fought for."
She added: "Our country can now see the sun and I want to meet the people responsible, those who stood up and went into the line of fire, giving everything for our country's freedom. They are Ukraine's best sons."
"Heroes never die," a phrase previously used by Tymoshenko, was chanted by the crowds in response to her speech, in which she said: "You have tried to eliminate this cancerous tumour and for that it was important for you to stand at the barricades and face the bullets of snipers ... This nation will never be subdued - it will never bow to anyone ... because you would not allow it, because your strength, your force, is indefatigable."
On Friday, Tymoshenko's daughter Yevgenia wept in Parliament as ministers voted to release her mother. The 23-year-old had campaigned for her mother's freedom since her imprisonment in 2011, and was overcome when the move was agreed.
Yesterday afternoon Tymoshenko was reunited with Yevgenia, her only child. The two women cried and embraced.
A spokesman for the White House said the US welcomed her release, and pledged to work with Russia and other allies to back Ukraine. Russia spoke out against the protesters.
Russian Foreign Minister Sergei Lavrov said: "Illegal extremist groups are refusing to disarm and in fact are taking Kiev under their control with the connivance of opposition leaders."
As night fell, 30,000 opposition supporters on Kiev's Independence Square, scene of nearly three months of protests, were in buoyant mood. "People can taste freedom and take off their flak jackets," said Vasily, 40, a builder.
There was sadness too as coffins were displayed in front of the crowd and priests said prayers.
People crossed themselves in front of makeshift shrines with candles and pictures of the dead. Two captured water-cannon trucks were parked in the square like trophies of battle.