Arad’s plane was shot down over southern Lebanon in 1986.
President Moshe Katsav said on Thursday that Arad was alive as recently as three years ago and was in an Iranian prison at the time.
German mediators are trying to broker a prisoner swap between Israel and Lebanese resistance group Hizb Allah held up by disputes over who to include and over whether at least information on Arad's fate should be part of the deal.
Katsav told reporters at Israel's parliament on Thursday that "according to what he knows, Ron Arad is alive," presidential spokesman Adar Avissar told Reuters.
"'I'm not saying this out of wishful thinking'," Avissar quoted Katsav, who emigrated from Iran as a boy, as saying.
Handed to Iran
Israeli officials believe Arad was captured by Hizb Allah after he bailed out of his plane. He may have been handed over to Iran. Iran denies any knowledge of Arad's whereabouts.
Israel's cabinet has given preliminary approval for the swap of some 400 Palestinian and other Arab prisoners for an Israeli businessman, who is also a reserve officer, captured by Hizb Allah in 2000 and three soldiers who are believed dead.
Sharon, speaking separately to reporters in Tel Aviv, said swap negotiations were continuing through mediators but did not elaborate.
The negotiations, conducted on-and-off for three years, bogged down again this month after Israel ruled out freeing a Lebanese prisoner, Samir al-Qantar, involved in a 1979 attack in Israel in which three people were killed.