Major Alfredo Reinado, who led a rebel group of sacked soldiers, was arrested by Australian troops, Australian Brigadier Gus Gilmore said on Wednesday.
The arrest came the day after a gun amnesty designed to contain recent violence expired.
"Major Reinado, together with a group of 21 other people, was identified as being in possession of weapons without authorisation and was detained," Gilmore said.
He said 11 handguns and a "significant amount of ammunition" were confiscated from them.
"Major Reinado and those detained with him will now be dealt with by the Timorese authorities," he said.
Longuinhos Monteiro, East Timor's prosecutor-general, confirmed the arrest, saying Reinado had "to account for" the guns and ammunition.
Rebels led by Reinado had surrendered their weapons to Australian troops last month on the orders of Xanana Gusmao, East Timor's president.
Reinado and his rebels fled to the hills in April after battles with loyalist forces in Dili before more than 2,200 Australian, Portuguese, Malaysian and New Zealand peacekeepers were invited into East Timor by the president to restore order.
The fighting between soldiers ballooned into widespread street violence that killed at least 30 people and drove 150,000 from their homes.
The unrest had its origins in the March sacking of about 600 soldiers by Mari Alkatiri, the former prime minister. They had deserted their barracks complaining of discrimination.
Gusmao has defended Reinado, saying that he led his men into the mountains to avoid conflict.
Meanwhile on Wednesday, the Australian foreign minister said the situation in East Timor had stabilised and Canberra would soon reduce the 1,400 troops it has there.
"But pulling them out altogether is going to depend very much on the situation on the ground," Alexander Downer told Malaysian television.
"It's going to depend a bit on the United Nations too. The sort of new mission that the United Nations set up in East Timor will influence us, I suppose."