A police spokeswoman identified him as Mahjub Abderrazak, an Algerian known as "the sheikh." Currently held in Hamburg, he is to be extradited to Italy for trial, a German state prosecutor said on Friday.
Prosecutors in Milan, northern Italy, had earlier issued arrest warrants for five people, including Abderrazak, on suspicion of having recruited suicide attackers for strikes in Iraq.
Abderrazak had been previously arrested by German police in July, on that occasion on suspicion of plotting to bomb Spanish holiday resorts, but he was later released for lack of evidence.
German investigators had reportedly trailed Abderrazak for months, tapping his mobile telephone. According to the news magazine Focus, he made regular calls to Islamic hardliners in north Africa and southern Spain.
Focus also reported that he knew members of the al-Qaida cell in Hamburg, northern Germany, that provided three of the hijackers in the September 11, 2001 attacks in the United States.
Italian investigators believe he has been putting together a cell under the umbrella of the al-Tawhid group which is run by fugitive Abu Musab al-Zarqawi, and whose stated aims are regime change in Jordan and the killing of all Jews.
Italian prosecutors said the Milan-based cell had contacts across northern Italy, was trying to recruit suicide bombers for attacks in Iraq.
US intelligence sources believe that the cell has transferred paramilitary camps specialised in chemical weapons from Afghanistan to northern Iraq and recruited volunteers for the sites.
Washington has claimed Zarqawi was a link between al-Qaida and ousted Iraqi leader Saddam Hussein.
Italian prosecutors said the Milan-based cell had contacts across northern Italy, and was trying to recruit suicide bombers for attacks in Iraq.
Before arriving in Iraq, the recruits undergo training in camps in Syria or in Turkey near Istanbul.
Italian forces serving in Iraq were hit by a suicide attack earlier this month when an explosives-laden truck destroyed a police base in the southern Iraqi town of Nasiriyah, leaving 28 people dead including 19 Italians.
It was worst attack on Italian forces since World War II.