The Briton was questioned, and later cleared, for a day by airport security officials and police on the island, which is on high alert for possible Islamic terrorist attacks on Western and Russian tourists.
The man, identified by local authorities as Davide Fogli, told officials that he bought the item - featuring a timer attached to what looked like sticks of dynamite - at a toy store. He reportedly intended to take it to a New Year's Eve party.
He declared the toy bomb to the first line of screening officials at the airport and asked if he could bring it on the flight, according to police.
But when the report reached Trikora Harjo, the airport general manager, he ordered that Fogli should be questioned further.
"This was a very realistic toy and in the current climate, we wanted to know more about his plans," said an official.
The Qatar Airways flight bound for Doha had already taxied on to the tarmac to prepare for take-off, before it was ordered to return to the terminal and Fogli and his friend were escorted off the plane.
Trikora said he took the decision to investigate further "in accordance with the instructions of the Director General of Transportation".
The flight then left for Doha while the British tourist was questioned first by airport security officials and then by police in the provincial capital Denpasar on Monday.
Officials on Bali are on high alert for possible terror plot during one of the busiest seasons for tourism. More than 200 people, mainly Australian holidaymakers, were killed in a 2002 bomb attack by Islamic extremists on a nightclub.
Airport officials have stepped up security after a Russian passenger plane was blown up over the Sinai desert.
Although Bali is predominantly Hindu, Indonesia is the world's most populous Muslim nation. Hundreds of Indonesians have travelled to Syria to fight with Isis (Islamic State) and Jabhat al-Nusra, an al-Qaeda affiliate, and there are fears that a terror cell might be sent back to Indonesia to commit atrocities.
Officers were sent to the toy-store where they found an item for sale identical to the one that Fogli was carrying.
The couple was finally cleared and released from custody shortly before midnight on Monday, more than 24 hours after they were hauled off the plane.
"We are releasing them now," said Reinhard Habonaran Nainggolan, the police chief.
"We have found no indication of suspicious reasons, he just bought a toy. But since airport authority filed a report, we had to do a follow up."
Fogli, who is a graphic designer, and his friend, an Italian lawyer, declined to talk to media when they left the police station. According to his British passport, he is aged 48 and was born in Turin.
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