An American woman in jail in Bali for the gruesome killing of her own mother has been forced to relinquish custody of her two-year-old daughter, with an Australian woman to now care for the child.

Heather Mack was jailed along with her boyfriend Tommy Schaefer for killing her mother, Sheila von Wiese-Mack, and stuffing the body in a suitcase.

They had been staying in a five-star luxury resort in Bali in August 2014 when they attacked the woman.

The child, Stella, was born in Bali on March 17, 2015, but under Indonesian law once a child turns two they must be cared for outside of prison.

Ms Mack, 21, is serving 10 years in Bali's Kerobokan prison for murder, while her 23-year-old boyfriend is serving 18 years.

The Australian woman, Oshar Putu Melodi, who is married to an Indonesian, took the child from the prison on Friday morning, after a small party was held to mark her birthday.

She is described as being a close friend.

Schaefer's mother had tried to seek custody of the child through a court in the United States, but failed.

The baby has been raised in Kerobokan prison since birth.

Heather Mack is serving a 10-year sentence for murdering her own mother. ( Supplied: Ambros Boli )

"There was a lot of crying," Ms Mack's lawyer Yulius Benyamin Seran said after the child was taken from the prison.

"The last minutes before we are going out Tommy was also there, there was cyring."