VANCOUVER, British Columbia—A Canadian judge granted bail to Huawei Technologies Co. finance chief Meng Wanzhou, setting the stage for a new confrontation with China as the U.S. seeks the executive’s extradition to face charges over violating Iran sanctions.

The judge’s decision Tuesday frees Ms. Meng after more than a week in detention, though it requires her to submit to a curfew, electronic monitoring and a limited range of travel in the Vancouver area.

Justice...