Al-Masri, an Egyptian also known as Abu Hamza al-Muhajiris, is believed to have taken over from the late Abu Musab al-Zarqawi in June, after he was killed in a US airstrike.
Mowaffak al-Rubaie, Iraq's national security adviser, played a video at a news conference that he said showed al-Masri rigging up a car bomb near Baghdad.
A man resembling him was seen unrolling electric wire inside a car.
Speaking at the conference, al-Rubaie warned the al-Qaeda leader that his days were numbered and said: "Security forces are closing in. We are very close."
Zalmay Khalilzad, the US envoy to Iraq, told CNN that al-Qaeda was no longer the main threat to stability in Iraq: "The importance of the sectarian violence has increased while ... the al-Qaeda terrorists have weakened."
However, with George Bush's Republicans under pressure in congressional elections next month, he warned against a hasty withdrawal of the 140,000 US troops as that, he said, could afford al-Qaeda a new base from which to operate.
Meanwhile, just west of Baghdad, in the Sunni stronghold of Falluja, a car bomb killed four people and wounded six in a busy vegetable market, according to police reports.
In the same region, two US soldiers were shot dead on Saturday, the military said in a statement.