Amjad Husain Faruqi, 30, said to be running al-Qaida operations in Pakistan, was killed during a two-hour shootout in the southern province of Sindh on Sunday.
"He was the right-hand man of Libyan Abu Farraj Faraj," a senior security official said, referring to the new operational chief of al-Qaida.
President Musharraf, who is visiting the Netherlands, was immediately informed of Faruqi's death.
"We've eliminated one of the very major sources of terrorist threat. Not only was he involved in the attacks on me but also in attacks elsewhere and terrorist attacks elsewhere in the country. So a very big terrorist has been eliminated," Musharraf said.
Information Minister Shaikh Rashid Ahmad, who is with Musharraf, said Faruqi was killed in a bloody shootout with security forces in the town of Nawabshah, 130km northeast of Karachi.
"We have arrested three of his accomplices. They are all very important, wanted terrorists," the minister said, promising to disclose details in a few days.
"It is yet another success of Pakistani intelligence fighting against terrorism," he said.
Faruqi carried a $330,000 (20 million rupee) bounty on his head.
Information Minister Ahmad hails
success of Pakistani intelligence
Armed with automatic weapons, he and his accomplices put up "very strong" resistance when their hideout was surrounded.
"We challenged the inmates to surrender but they opened fire at the security officials, triggering a gun battle which lasted more than two hours," a security official said on condition of anonymity.
"I will prefer death," the defiant fighter shouted during the battle, according to the official.
When security forces entered the house they found him dead.
"Faruqi's elimination is a crushing blow to the al-Qaida network in Pakistan because he was the man who had been providing al-Qaida the manpower for carrying out attacks in the country," the official said.
Faruqi was named the "Pakistani mastermind" of the 25 December assassination attempt on Musharraf.
More than a dozen people were killed in that attack when two human bombers detonated their explosives-laden vehicles close to the president's motorcade.
Faruqi was on a list of Pakistan's
most wanted suspects
Faruqi was also wanted over the murder of US Wall Street Journal reporter Daniel Pearl in 2002.
Security officials described him as "an extremely intelligent and elusive terrorist operative" who was indicted over Pearl's murder, but was never caught.
Officials say Faruqi recruited the trio of men who slit Pearl's throat as a video-camera filmed.
He was also connected to the car bombing outside the Sheraton Hotel in Karachi in May 2002 that killed 11 French technicians working on a submarine project in Pakistan, according to Fayyaz Leghari, a deputy inspector general of police.
He has been linked with several banned groups, including Harkat-ul-Jihad-e-Islami and Jaish-e-Muhammad, both of which have had members arrested for attempting to kill Musharraf.
Troops have blown up homes of
suspected al-Qaida linked fighters
He was also said to be "very close" to Ahmad Umar Saaid Shaikh, the British-born militant convicted of plotting Pearl's abduction and murder.
Pakistan security forces have captured about 600 alleged al-Qaida suspects since late 2001 and handed the majority over to US custody. But the toll on their forces continues to rise.
Assailants ambushed a convoy of Pakistani soldiers as it passed along a road in violence-plagued South Waziristan, killing three soldiers and wounding six with rocket fire after setting off a roadside bomb, an army spokesman said.
Two rockets were fired at the convoy soon after the bomb went off near the town of Sarwakai, an area east of Wana, the main town in South Waziristan, said Brigadier Shah Jahan Ali Khan, a spokesman for the Pakistani army.
One rocket hit a truck, and three soldiers were killed and six others were injured, he said.
The troops were moving from Sarwakai to Jandola, another area where security forces have clashed with suspected armed dissidents in recent weeks.