Ali Belhadj, the former number two of the banned Islamic Salvation Front (FIS), was placed in provisionary detention and his brother Abdelhamid Belhadj was released on bail after being charged with statements justifying terrorism, the source said.
Ali Belhadj was arrested on Wednesday over televised remarks he made about the capture of two Algerian diplomats a short time before followers of al-Qaida's Abu Musab al-Zarqawi announced they executed the men.
The state prosecutor in Algiers, on Saturday, opened a judicial inquiry into the 21 July kidnap and murder of the head of the Algerian mission in Iraq Ali Belaroussi, 62, and attache Azzedine Belkadi, 47, the justice source said.
Ali Belhadj appeared to condone the kidnapping, telling Aljazeera "in accrediting ambassadors and diplomats in a country under occupation, (their) state only legitimises this occupation, which is unacceptable in the scheme of the sharia and policy".
"I salute the mujahidin on the soil of the resistance in Iraq; may God help them face with firmness and determination the looting occupier, his agents and acolytes ... inasmuch as history has taught us that jihad and resistance are the only answer to occupation."
An al-Qaida-linked group claimed
to have executed the diplomats
Algeria observed a minute's silence for the slain diplomats on Thursday, with Algerian President Abdelaziz Bouteflika vowing that the killers would be pursued with "cold determination".
Belhadj, known for his fiery sermons and criticism of authorities, was sentenced to 12 years in jail in 1992 for threatening state security.
He was released in July 2003 on condition he would not engage in politics, preach, attend public meetings or make speeches.
FIS leader Abassi Madani, jailed along with Belhadj on the same charge of threatening national security, has lived since August 2003 in Qatar.
The FIS, which wants an Islamic state in Algeria, was banned in 1992 when it was close to winning legislative elections.
About 150,000 people have died in the subsequent violence between insurgents and government forces, according to official figures.