Thursday's confrontation took place in the capital and Medina, where Prophet Muhammad is buried, in the first major anti-terrorist sweep since King Abdullah took the throne this month, the authorities said.
Saleh Muhammad al-Aoofi, the kingdom's most wanted man, had been leading al-Qaida's branch in Saudi Arabia for more than two years and was believed to have been involved in the June 2004 kidnapping and beheading of American engineer Paul Johnson.
Weeks after Johnson's slaying, Saudi police found his head in a freezer in an apartment where al-Aoofi had been hiding.
Al-Aoofi's death was the latest victory claimed by Saudi authorities in their crackdown on Islamic insurgents in the kingdom, launched after a wave of deadly attacks that began in May 2003.
Saudi police have killed or captured many of the figures on the kingdom's list of most wanted insurgents, and Abdullah vowed to push ahead with the crackdown when he was elevated to king in early August after the death of his half-brother Fahd.
Saudi forces launched a series of near simultaneous raids in the early hours of Thursday against six suspected insurgent hideouts in Medina, several of them near the Nabawi (prophetic) mosque, where Islam's Prophet Muhammad was buried, the Interior Ministry said in a statement.
Nine suspected insurgents were arrested.
At a seventh site in Medina, police besieged three elements holed up in a building in a fierce gun battle that left one policeman and a resident of the building wounded.
Saudi security killed two suspects
in a shootout in Riyadh
Two of the fighters were killed - one of whom was identified as al-Aoofi - and the third was wounded and captured, the ministry said.
Later on Thursday, the official Saudi Press Agency said the wounded policeman had died.
The raids came hours before Abdullah arrived in Medina, 720km west of the capital, to meet tribal leaders and pray at the Nabawi mosque.
At the same time as the Medina raids, police stormed an apartment in the al-Massef neighbourhood of Riyadh, sparking a firefight with armed elements holed up inside.
A security official, speaking on condition of anonymity, said four anti-government fighters were killed in the battle.
The Interior Ministry statement said human remains found at the Riyadh site indicated that at least one of the slain suspects was blown apart in an explosion.
Images on Saudi television showed the apartment littered with papers and broken furniture as police helicopters hovered overhead.
The ministry said one insurgent at the site was arrested and a cache of weapons, explosives and money was found.
The raids come a week after the US embassy in Riyadh closed its doors for two days and the British and Australian governments warned their citizens in the kingdom to be cautious amid reports that insurgents were planning new attacks.
The Saudi Interior Ministry said at the time that it had no information that a terrorist attack was imminent.
Al-Aoofi was one of only two figures still at large from a list of 26 most-wanted anti-government elements that was issued in December 2003.
A Saudi security officer was killed
in the battle in Medina
The remaining man is another Saudi, Talib Saud Abdullah al-Talib, while the others have either been captured or killed.
Saudi authorities issued a second list of 36 wanted suspects in June, several of whom have already been captured or killed.
It was not immediately known if any of the other al-Qaida elements involved in Thursday's raids were on that list.
Al-Aoofi, a former Saudi prison guard, was a veteran mujahid (warrior), reportedly fighting in Chechnya before travelling to Afghanistan shortly before the 11 September 2001 attacks on Washington and New York.
There he met men who would later become his comrades in the Saudi anti-government network, according to Saudi newspaper reports.
He was a top deputy in al-Qaida's cell in Saudi Arabia when it launched its wave of bold assaults, including a 12 May 2003 car bombing of foreigners' housing compounds in Riyadh that killed 35 people.
At the time, the cell was led by Saudi Abd al-Aziz al-Moqrin, who is believed to have masterminded the 12 June 2004 kidnapping of Johnson, an engineer with Lockheed Martin.
Johnson's kidnappers announced his slaying six days later, posting pictures of his beheading on the internet. Hours later, Moqrin was killed in a gun battle with Saudi police. Al-Aoofi succeeded him, and Saudi authorities launched a manhunt for him.
Saudi Arabia is the birthplace of Osama bin Laden and home to 15 of the 19 alleged 11 September hijackers.
The wave of al-Qaida attacks have shaken the kingdom's rulers, who fear it is a campaign to oust them.
Abdullah, who was de facto ruler since Fahd suffered a debilitating stroke in 1995, launched a fierce crackdown of arrests and raids and began a campaign against radical Islamic ideology in the kingdom's mosques.
The last major attack came in December 2004, when radical Muslim insurgents invaded Jedda's heavily guarded US consulate, killing nine people.
Since then, al-Qaida elements have largely been on the defensive, with Saudi security forces announcing the killing or capture of one major figure after another.