Ali Belhadj, formerly deputy head of the Islamic Salvation Front (FIS), was arrested at his home on Wednesday and taken to a central police station after making the comments on Aljazeera television, his brother Abdelhamid said, on the same channel.
His arrest came as the country mourned the deaths of two of its diplomats murdered in Iraq.
The group linked to al-Qaida in Iraq led by Abu Musab al-Zarqawi said in an Internet statement it had killed the head of Algiers' diplomatic mission in Baghdad, Ali Belaroussi, 62, and attache Azzedine Belkadi, 47, in line with the verdict of an Islamic tribunal.
Armed men seized the two diplomats as they were leaving the embassy in Baghdad by car last week. They appeared in a video posted on a website on Tuesday, in which the group vowed to execute them.
In his interview Ali Belhadj said he "saluted 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 (holy war) and resistance are the only answer to occupation."
He said that the two kidnapped diplomats had been seized in their capacities of diplomats and ambassadors. "Now, in accrediting ambassadors and diplomats (their) state only legitimises this occupation, which is unacceptable on the levels of sharia (Islamic law) and politics."
"May God help them face with firmness and determination, the looting occupier"
Islamic Salvation Front
However, the leader of the National Reform Movement in Algeria denounced the killing of the two Algerian diplomats.
Sheikh Abdullah Jab Allah said in a statement - a copy of which was obtained by Aljazeera - that "this illegitimate act does not fall within the norms of resistance, but would confuse the legitimate resistance and defame and distort its image before the Arab and Islamic public opinion, and the rest of the world as well."
The Algerian government announced on Wednesday a minute's silence to be observed across the country at midday on Thursday in memory of the two murdered diplomats.
President Abdelaziz Bouteflika sent his "sincere condolences" to the families of the two diplomats and expressed his "compassion and solidarity" with them, according to a presidential statement reported by the Algerian news agency APS.
Belhadj (with white cap) was
conditionally freed in July 2003
"Algeria has moved from the astonishment which followed the kidnapping to indignation at this heinous execution," Bouteflika said. Such an act "was against all the civilised and human values" and Algeria would pursue these killers with "cold determination".
Belhadj was sentenced to 12 years in jail in 1992 for "threatening state security" and released in July 2003. A condition of his release was that he did not engage in political activities.
The FIS, which wants to create an Islamic state in Algeria, was banned there in 1992 when the group was on the verge of winning legislative elections. Between 100,000 and 200,000 people are estimated to have died in the subsequent violence between Islamist rebels and government forces.