Cem Halavurt, a lawyer for Mr Brunson, confirmed he was to be placed under house arrest, and would have to wear an electronic ankle bracelet.
Pence warned that if Turkey does not take immediate action to free Brunson, "the United States of America will impose severe economic sanctions on Turkey". "This innocent man of faith should be released immediately!".
The Rev. Andrew Brunson, a Protestant missionary, has spent almost two years in jail on charges of collaborating with Turkey's foes and attempting to stir chaos by inciting hatred based on religious and ethnic differences.
"While he is out of jail he is still not free", Pence said, addressing a conference on religious freedom."And to President Erdogan and the Turkish government, I have a message on behalf of the president of the United States of America".
Brunson, 50, an evangelical Christian pastor originally from North Carolina, was let out of jail on Wednesday, after 1 1/2 years, to serve house arrest because of "health problems", according to Turkey's official Anadolu news agency. One of Brunson's attorneys is Jay Sekulow, who also represents Trump in the Russian Federation investigation.
Trump has repeatedly demanded Brunson's release and said on Twitter last week that the pastor's detention was "a total disgrace".
USCRIF annually issues a country-by-country, religious-freedom report to the State Department, which includes recommendations to the secretary of state and president for penalties against the worst violators.
Mevlut Cavusoglu has further strained tensions between the US and Turkey
US officials had been under the impression that the deal was in place, the source said, adding that when Brunson was not released, Pence spoke with Trump and the two agreed harsh new policy measures were needed to force the issue. He could receive another 20 years if he is found guilty of espionage.
Pompeo announced additional aid for a region of Iraq previously held by the Islamic State group.
The case has strained ties between North Atlantic Treaty Organisation allies Turkey and the United States.
Last September, Erdogan suggested that Turkey could free Brunson if Washington handed over Gulen, who lives in self-imposed exile in Pennsylvania - an offer brushed off by Washington.
The Second High Penal Court in the western province of Izmir rejected Andrew Brunson's plea for release, and instead chose to continue listening to the testimonies of witnesses in the next hearing scheduled for October 12.