Urging the authorities to provide for his medical treatment, Human Rights Watch (HRW) said the man released was an associate of Tenzin Delek Rinpoche, another monk who was given a suspended death sentence in 2002.
"Here is a man who dedicated much of his life to preserving the culture and physical environment of Tibetan areas, and he was physically broken while being held by Chinese authorities," HRW said in a report published on Wednesday.
It said Phuntsog, who is in his mid-40s, is now unable to walk or speak clearly as a result of his treatment in prison.
"Chinese officials have to explain how they allowed this to happen to someone in their custody," the group said.
Beijing had focused on Phuntsog's connection to Rinpoche, who is accused of involvement in a series of bomb blasts in an ethnic Tibetan area of southwestern China.
China's Communist Party imposed its rule on Tibet when its troops entered the Himalayan region in 1950. Other regions of west and southwest China are also home to large Tibetan populations.
Tibet's spiritual leader, the Dalai Lama, fled into exile in India in 1959 after an abortive uprising, and Beijing remains sensitive to any sparks of Tibetan nationalism or separatism.
"Chinese officials have to explain how they allowed this to happen to someone in their custody"
Human Rights Watch
HRW said nothing was known about the charges against Tashi Phuntsog, whom it describes as Tenzin Delek's right-hand man and said had been active in trying to stop a government deforestation programme in the region.
He was released after two years and nine months of his seven-year sentence. Tenzin Delek is still in prison, and state media has reported his death sentence could be commuted to life in jail.
International rights groups and exiled Tibetan activists have said his trial was flawed and lobbied for his release.
China executed Lobsang Dhondup, another Tibetan tried alongside Tenzin Delek, in January 2003, despite protests from rights groups and diplomats.