If you aren't interested in having sex with this person or with anyone, I think it's important to tell him that. That doesn't mean you can't date if he's ok with not having sex. I just don't think leading someone on is right (and I think you feel the same way). That said, there is no need to tell him you don't find him physically attractive. Clearly, something attracts you to him (his personality and not his looks). I think this leads to more lasting relationships anyway.

I am not particularly physically attracted to the guy I am seeing right now, but it doesn't really matter as the relationship works for both of us.