Terry was selected despite the July court case awaiting him regarding allegations that he racially abused QPR defender Anton Ferdinand, which Terry denies. Ferdinand's elder brother Rio being left out of the squad will help to avoid any tension that could have stemmed from the pair sharing a dressing room in Poland and Ukraine.
Hodgson said: "If we take the court case first of all, that's obviously very unfortunate for him but we must emphasise he is an innocent man until such time as he is proven guilty. My decision with John Terry was based purely on footballing matters, I was given a free hand as to the squad I picked."
The impending court case also saw Terry stripped of the captaincy by the Football Association, a decision which saw Fabio Capello resign his post and Hodgson eventually succeed him. Liverpool midfielder Steven Gerrard will captain England this summer.
Hodgson added: "I realised that when I selected him there would be people who would raise eyebrows but that's the decision that I've made, that's the decision I shall live with."
He went on to say: "I selected John Terry for footballing reasons and I left out Rio Ferdinand for footballing reasons. I've spoken to both of them of course. I had to do that.
"In the last couple of days I've spoken to both of them and explained to them why I've come to the decision."
Hodgson said: "I believe John Terry, especially in the latter part of the season, has played very well.
"I know you'll say he shouldn't have done what he did in Barcelona but I'm looking over a longer period than that.
"I think he's played well, I think he played an important part in Chelsea's FA Cup final victory, an important part in their reaching the Champions League final and so therefore I selected him because I think he's the man for job. I'm hoping and believing that he will help us win matches."