Israel's internal Shin Bet security service had been holding him in so-called administrative detention for longer than eight months.
Israeli law allows people considered security risks to be held in administrative detention, although it is rare for Jewish citizens to be imprisoned under this law.
Many suspected Palestinians are held for years under the same law, without any charges brought against them.
Barrels of petrol
Federman was arrested for being involved in the plot to detonate a powerful bomb in the courtyard of a school for Arab girls in the al-Tur neighbourhood of East Jerusalem.
He was also charged with providing four Jewish settlers with explosives, but was never tried in the case.
Police discovered the bomb, comprised of two gas balloons and two barrels of petrol, in a cart. It was set to go off in the morning when the school's 1500 students lined up in the courtyard for their morning assembly.
"I think the government should put bombs in [Palestinian] hospitals, but unfortunately the government doesn't do it, so it is up to the people to do those things"
Detectives were considering the possibility that the bomb was intended to be detonated on the sidewalk between the school and the adjacent Muqassed Hospital.
Federman was quoted in Israeli newspapers as saying, "I think the government should put bombs in [Palestinian] hospitals, but unfortunately the government doesn't do it, so it is up to the people to do those things".
Federman is still a leader of the militant Jewish settlers in the West Bank city of Hebron and was active in the anti-Arab Kach movement.
In New York, 1968, Rabbi Meir Kahane established the Jewish Defense League, the forerunner of the Kach movement. The declared goal of the movement at the time was to combat black hostility towards Jewish Americans.
The actions and intentions of this movement were found to be ''manifestly racist'' by the Israeli High Court of Justice in 1988. It was also outlawed a decade ago.