Libya was for the Italian settlers. I'm not sure Mussolini would want millions of Jews becoming the majority of his colony.
Also it would upset the Arabs. Having westerners colonizing their land was bad enough. Having Jews moving in would provoke them to anger and the Germans and Italians wanted to make good relations with the Arabs.
Yes, OTL the about 100,000 Jews of Libya were attacked by Arabs during and after the war. During the war they couldn't really go anywhere so ironically enough they relied on the Afrika Korps for protection from attacks from Arab extremists. After the war they pretty much all left for Israel in the face of increasing violence. The North African Jews that left gave Rommel's son an honorary title after the war.
They certainly weren't safe in Israel after the war either, but there was enough of them in one spot with enough international support to defend themselves.
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