Seif al-Islam Gadhafi told reporters that the Israeli-Tunisian dual national was not a spy and corroborated the man's story that he was in the country to photograph heritage sites connected with Libya's vanished Jewish community.
"This person was naive ... he is not a spy and I made use of this issue in favor of our Palestinian brothers in Gaza," he said. "Palestinian prisoners were released in exchange for releasing the Israeli."
Gadhafi would not say how many Palestinians were released for Rafael Rafram Chaddad, who was freed Sunday after five months in jail.
Libya bans Israelis from entering the country, though Chaddad was traveling on his Tunisian passport at the time of his arrest.
On Monday, Israeli officials said the deal involved delivery of 20 prefabricated homes from a Libyan charity to the Gaza Strip. They said the agreement was arranged by Foreign Minister Avigdor Lieberman and an Austrian-Jewish businessman, Martin Schlaff.
Lieberman has refused to reveal what promises were made to Libya but has said Tripoli's demands were reasonable.