The remarks may represent a compromise between Saudi Arabia's religious hardliners and its social reformers amid international pressure for the conservative Islamic kingdom to enter a woman athlete for the first time at London 2012.
"Female Saudi participation will be according to the wishes of students and others living abroad. All we are doing is to ensure that participation is in the proper framework and in conformity with sharia," he was reported to have said.
Top Saudi clerics who hold government positions and have always constituted an important support base for the ruling al-Saud royal family have spoken against female participation in sports.
In 2009 a senior cleric said girls risked losing their virginity by tearing their hymens if they took part in energetic sport.
Last month the International Olympic Committee said it was "confident" that the world's top oil exporter was working to send a female athlete to the games after a campaign by Human Rights Watch.
Perhaps the most likely woman candidate to compete under the Saudi flag in London, equestrian Dalma Malhas, represented the kingdom at the junior Olympics in Singapore in 2010, but without official support or recognition.
Physical education is banned in girls' state schools in the kingdom, but Saudi Arabia's only female deputy minister, Noura al-Fayez, has written to HRW saying there is a plan to introduce it.
Prince Nawaf acknowledged there was a growing demand for sports among Saudi women.
"There are now hundreds or thousands who practice sports but in a private way and without any relationship to the General Presidency of Youth Welfare," he said.
(Reporting by Angus McDowall; Editing by Alison Williams)