"Glad that David Bolam is safe & well after his ordeal and has been reunited with his family, who we have been supporting since he was taken," Foreign Secretary Philip Hammond wrote on Twitter.
Bolam was kidnapped by militants in May in Libya's second city Benghazi, much of which is under the control of Islamists.
The 53 year-old, who hails from Shropshire in western England, was Head teacher at the International School in Benghazi.
The BBC reported that his release had been secured by local political factions and that money had changed hands. It said that Bolam whose kidnapping had not been reported at the request of officials, was flown back to Britain on Thursday.
His captors had contacted the Libyan director of the school to demand a ransom, according to a source at the establishment speaking on condition of anonymity.
Bolam's release follows the beheading of British aid workers David Haines and Alan Henning, among four Western hostages executed since August by Islamic State (IS) jihadists.
American journalists James Foley and Steven Sotloff were also brutally executed by IS militants operating in Syria and Iraq, with all four murders made public in videos.
The hometown of taxi driver Henning, Eccles in northwest England, paid tribute to the 47-year-old in a candlelit church service open to all faiths, after his death was announced late on Friday.
Floral tributes to the aid worker, who travelled to Syria as a driver in an aid convoy, were left outside his minicab office and home, and yellow ribbons traditionally tied for hostages festooned the town centre.
The British foreign office said that since teacher Bolam was released, his family had appealed for privacy.
The SITE intelligence group identified a video posted on YouTube last month of Bolam, looking dishevelled and wearing a white T-shirt, appealing for British Prime Minister David Cameron to help secure his release.
The video, apparently recorded in August, was released by a group that called itself Jeish al-Islam (Army of Islam) but SITE could not authenticate it due to a lack of information.
A former teacher at Bolam's school, Ged O'Connor Challis, told the BBC that he had spoken to Bolam on the telephone the morning he was kidnapped.
He said Bolam had been captured while he was out shopping.
"He is single-minded and stubborn," Challis added. "He is a very bright person. He is an English teacher -- one of the best I have ever met."
Michael Aron, Britain's ambassador to Libya, wrote on Twitter: "Delighted Benghazi Head Teacher David Bolam has been released after over 4 months in captivity".
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