The U.S. military in Baghdad said it was "checking with Iraqi authorities to confirm the accuracy of this information."
Interior Ministry spokesman Maj. Gen. Abdul-Karim Khalaf said the arrest occurred "at midnight and during the primary investigations he admitted that he is Abu Hamza Al-Muhajir."
Khalaf told the Iraqi state television that al-Masri was arrested during a police raid, but gave no other details.
"Now a broader investigation of him is being conducted," he said.
His apprehension would carry major symbolic value for Iraqi commanders, who have led operations in the Mosul area and have sought to counter worries that Iraqi forces lack the training and discipline to wage a head-on fight against insurgents.
But it's unclear how much the reported loss of al-Masri would disrupt al-Qaida in Iraq or its long-term ability to wage suicide attacks and other strikes. Al-Masri took over al-Qaida in Iraq after its leader, Abu Musab al-Zarqawi, was killed June 7, 2006 in a U.S. airstrike northeast of Baghdad.
But the pace of insurgent attacks remained strong as al-Masri took charge.
"The commander of Ninevah military operations informed me that Iraqi troops captured Abu Hamza al-Muhajir the leader of al-Qaida in Iraq," al-Askari told The Associated Press by telephone.
There have, however, been false alarms in the past about al-Masri. At least twice - in 2006 and May 2007 - reports circulated that al-Masri was dead, but they were later proved wrong.
Any direct links are murky between al-Masri's insurgents and the terror network of Osama bin Laden. But al-Masri has followed a path that brought him in contact with some of bin Laden's top lieutenants.
U.S. officials said al-Masri - whose name means "The Egyptian" in Arabic - joined al-Qaida camps in Afghanistan in the late 1990s and trained as a car bombing expert before traveling to Iraq after the U.S.-led invasion in 2003.
The U.S. military also described al-Masri as a previous member of the extremist Islamic Jihad in Egypt and a protege of Ayman al-Zawahiri, who became bin Laden's No. 2 after the group joined with al-Qaida in 1998.
The Islamic State of Iraq, an umbrella organization that includes al-Qaida in Iraq, last year announced an "Islamic Cabinet" for Iraq and named al-Masri as "minister of war." The U.S. military had put a $5 million bounty for al-Masri.
The arrest was also significant for its location.
Mosul was considered the last important urban staging ground for al-Qaida in Iraqi and allied groups after losing strongholds in Baghdad and other areas during the U.S. troop "surge" last year.
In January, Iraq's prime minister Nouri al-Maliki promised his military were preparing for a "decisive" showdown with insurgents in Mosul, about 225 miles northwest of Baghdad. But no major offensives have been mounted even al-Qaida in Iraq tried to exert its influence in Iraq's third-largest city through attacks and intimidation.
The reported arrest of al-Masri also turned attention back to the Sunni insurgency after weeks of battles with Shiite militias.
In Baghdad, government envoys set strict demands for Shiite militias to end their battles against U.S.-led forces in Baghdad. But it was unlikely that militiamen would abide by the government conditions to lay down their arms.
But the government outreach to representatives of anti-American cleric Muqtada al-Sadr - who controls the powerful Mahdi Army militia - underscored the worries about a mounting humanitarian and political crises for Iraq's leadership if the fighting spreads.
Thousands of civilians already have fled their homes in the teeming slum - home to nearly 40 percent of Baghdad's population - and aid groups say some areas are desperately short of food and medicine after seven weeks of street battles.
The latest conflict flared in late March after Prime Minister Nouri al-Maliki ordered a crackdown on armed Shiite factions in the southern city of Basra, the nation's second-largest urban area. Mahdi fighters quickly rose up in Basra and Sadr City, their stronghold in Baghdad.
Attacks returned to Basra as several rockets hit what the U.S. military described as a "contingency operating base," killing at least two civilian contractors and wounding four soldiers. The statement did not provide the nationalities.
Helicopters and a drone fired back, killing six extremists. It was the first such attack causing casualties in Basra since March 27, the military said.
In a bid to end the fighting, a committee from parliament's Shiite bloc met with al-Sadr representatives, a senior member of the government group said.
Jalal Eddin al-Sagheer of the United Iraqi Alliance, an umbrella group in parliament that includes al-Maliki's party, said the committee demands that militants lay down their arms and clear all roadside bombs planted in Sadr City.
"The meeting is about conditions set by security forces to enter the whole of Sadr City," al-Sagheer said. "Gunmen holding weapons will not be allowed, all roadside bombs must be cleared and all wanted criminals must be handed over."
A Shiite lawmaker from al-Sadr's bloc, Gufran al-Saadi, confirmed the meeting took place but insisted U.S. troops must first withdraw from the district before talks can progress.
"We have no problems with the Iraqi army, but the U.S. army is bombing Sadr City," she said. "We demand the withdrawal of U.S. troops an end to U.S. attacks on Sadr City."
So far, the cashes are mostly confined to the southern part of the district where U.S. and Iraqi forces are building a barrier - reaching up to 12-feet high - to isolate it and disrupt supply and escape routes for militants.
"We really hope to block the north and the south," said Lt. Col. Tim Albers, an intelligence officer with the Multinational Force in Baghdad and the U.S. Army 4th Infantry Division.
The U.S. military said it had nearly completed an operation to build a wall along a main street dividing the southern portion of Sadr City from the northern areas, which are farther from the Green Zone. A primary goal is to put the enclave out of range for militia rockets and mortars.
"Within the next two weeks we should be done with the barrier part of the plan," said Col. Allen Batschelet, the chief of staff for forces in Baghdad.
He added extremists "are not happy because, once the wall, is in they are cut off."
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Associated Press reporter Qassim Abdul-Zahra contributed to this
report from Baghdad.
