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.