Yasir Sabhawi Ibrahim, son of Saddam's half brother Sabhawi Ibrahim al-Hassan al-Tikriti, was arrested on Wednesday in a Baghdad apartment by Iraqi police after Syrian authorities forced him to return to Iraq several days earlier, the officials said on condition of anonymity as they were unauthorised to speak to the media.
Ibrahim allegedly funded the insurgency against US-led forces in Iraq.
"He is the most dangerous man in the insurgency," said one of the officials who works as a coordinator between Iraqi authorities and the US military intelligence in the war-ravaged country.
The other official, who is a senior member of the Iraqi Defence Ministry, said: "This is one the most serious blows to the terrorist networks."
Both officials said Syrian authorities "pushed" Ibrahim into Iraq but did not hand him over to authorities.
But the Syrians were aware of his whereabouts in Baghdad and informed US authorities, who then passed the information to Iraq security forces who carried out a "fast, easy" raid on Ibrahim's apartment, the Defence Ministry official said.
On 21 July, the US Treasury froze property or other assets in the United States of Ibrahim and five other sons of al-Tikriti, who was himself captured in Syria earlier this year and handed over to Iraq in an apparent goodwill gesture.
Al-Tikriti, who was also a former adviser suspected of financing insurgents after US troops ousted Saddam Hussein, was captured in Hasakah in northeastern Syria near the Iraqi border.