The retreat came amid fears thousands of soldiers would be encircled in the town, Russia’s defence ministry said.
Recapturing Lyman is of strategic significance for Ukraine.
The town had been used as a logistics hub by Russia, and could give Ukrainian troops access to more territory in the Donetsk and Luhansk regions.
Video footage shared online showed Ukrainian soldiers waving their national flag on the outskirts of the town.
Although the blue and yellow colours were flying in Lyman again, fighting was “still going on” there, President Volodymyr Zelensky said in his evening video address.
However, he gave no further details.
The battlefield setback prompted the Chechen leader and hardline Moscow ally, Ramzan Kadyrov, to comment that Russia should consider using low-yield nuclear weapons in the face of such defeats.
Lyman is in Donetsk – one of four partially-occupied Ukrainian regions which Russia declared it was annexing on Friday. Ukraine and its Western allies have dismissed the move as an illegal land-grab.
An adviser to Ukraine’s defence minister earlier told the BBC that recent gains around Lyman – following days of intense fighting – represented a “considerable success”.
Russian fighters had been given the chance to surrender, Yurik Sak said, and would face better treatment as prisoners of war than from the Russian military leadership.
Shortly afterwards, the Kremlin said it was withdrawing its forces from the town, using its Soviet-era name of Krasnyi (Red) Lyman, acknowledging that the Ukrainians had “significant superiority in forces” in the area.
Military analysts say that Kyiv currently has momentum in the war, and it has vowed to forge ahead with a counter-offensive to reclaim all territory under occupation.
In a speech on Friday, Mr Zelensky said efforts to “liberate our entire land” would act as proof that international law could not be violated.
Source ; BBCnews