French prosecutor Eric Maillaud said he was released from police custody after investigators found "no direct link" between him and the events in 2012.
Mr Maillaud said:
"The searches and interviews of the last three days have not enabled us to establish a direct link between the events of 5 September 2012 and this man, a war weapons enthusiast, who looked very like the e-fit released and who was near to the place where the incident took place when it happened.
"However, the man will be taken into custody, overseen by the public prosecutor's office in Annecy, in connection with illicit trading in wartime weapons and ammunition found during searches by investigators, this illicit activity being carried out as part of an organised gang."
A second man arrested earlier this week in connection with alleged arms trading remains in custody.
A second man is in custody in connection with the Alps murders, a French prosecutor said today.
"We discovered a great number of munitions, explosives and detonators at his house," he added, saying the man may be involved in arms trafficking and was likely the business partner of a 48-year-old man arrested earlier.
He could not confirm a direct link between the arrest and the al-Hilli deaths.
The brother of Alps murder victim Saad al-Hilli said the arrest of a 48-year-old - believed to be a former policeman - in connection with the killing, is "better than nothing".
Last month Zaid al-Hilli, who was arrested in connection with the shooting, had his bail cancelled by Surrey Police after the force decided there was not enough evidence to charge him with a crime.
Asked on Sky News whether this arrest, if it leads to a prosecution, would bring closure to him, he replied: "Well of course, I mean, anything is better than nothing. We'll see what happens. We can't raise our hopes."
There is a gathering sense here tonight that this investigation is finally gaining momentum. This was a crime, which of course shocked, but quite swiftly seemed to baffle police, as they searched for a motive and then it seemed to frustrate them, as they searched for evidence.
As much as French investigators are trying to play down events here, they say the man being questioned here is being questioned as a witness, not as a suspect but it is really hard to disguise the idea that a breakthrough might be imminent.
The man we know was a former policeman. It has been reported by French media that weapons were found at his home. French police have four days to question him before charging but tomorrow the prosecutor is talking about holding a press conference. That suggests there is something significant to say.
A 48-year-old man arrested in connection with the the killings of a British engineer and his family in France is believed to be a former policeman.
Saad al-Hilli and his wife Ikbal, from Claygate in Surrey, and her mother Suhaila al-Allaf, who lived in Sweden, were all fatally shot on a remote forest road in Chevaline near Annecy on September 5 2012. Local cyclist Sylvain Mollier was also murdered.
French police today arrested a 48-year-old man, from the Haute-Savoie region of France, in connection with the killings.
According to local media, the man is a former municipal policeman who lived close to the scene of the murders in Chevaline. Investigators were said to be looking into places that he had frequented.