"Hossam al-Musseli was freed Saturday, he is safe and sound and in security," one source said, following the pre-dawn release.
A previously unknown militant group calling itself the Al-Ahrar Brigades said on Friday that it was holding the diplomat and demanded that Cairo release all Palestinian prisoners within 48 hours.
The ultimatum came as Palestinian security forces fanned out across the Gaza Strip in search of al-Musseli who was seized in Gaza City on Thursday, in the first abduction of a foreign diplomat in the increasingly lawless territory.
"If Egypt does not heed this demand, it will bear sole responsibility for the tragic consequences," the kidnappers had said in a statement.
"We ask the Egyptian people, the diplomat's family and all human rights watchdogs to pressure the Egyptian government to free all Palestinian prisoners in Egypt," it added.
In another statement, issued at the time of the hostage's release, the Brigades stressed their continued demand for the release of Palestinian prisoners.
The Egyptian diplomat was heading toward his offices in Gaza City when gunmen surrounded his car, forced him into another vehicle and drove off.
Militant groups loosely linked to the Fatah movement headed by Palestinian president Mahmud Abbas have been behind most kidnappings in the territory, which have usually been resolved without bloodshed.
Mr Abbas ordered an urgent manhunt for the kidnappers on Thursday.
Mr al-Musseli was described by Egyptian officials as a military advisor at the Egyptian diplomatic offices in the Gaza Strip.