Khair Mundos, who had a USD 500,000 US government reward on his head, was detained at 9.30am (0130 GMT) close to the capital's airport where he was staying with relatives, the police and military said after a joint raid.
The US State Department's "Rewards for Justice" website describes him as a "key leader and financier" of the Abu Sayyaf, an Islamic militant group blamed for the worst extremist attacks in the Philippines.
The group, founded with seed money from Al-Qaeda, is believed to have only a few hundred militants but has successfully carried out deadly bomb attacks and kidnappings, often targeting foreigners and Christians.
He was arrested "on the first-ever money laundering charges against terrorists", according to the "Rewards for Justice" website.
It said Mundos confessed in custody to having arranged the transfer of Al-Qaeda funds to the Abu Sayyaf's top leader for bombings and other criminal acts throughout Mindanao.
He was also charged in the Philippines with multiple murder charges.
However Mundos was among dozens of militants who escaped from Kidapawan City prison in Mindanao in February 2007, as part of a well-planned break.
Manila's criminal investigation chief, Senior Superintendent Roberto Fajardo, said on Tuesday Mundos had fled to the capital to avoid pursuit in the south, but he would not disclose how long the militant had been hiding in the city.
"It was getting too hot (in the south) so he came here while waiting for things to cool down," Fajardo told reporters.
Mundos was detained just outside the house of a relative and did not resist arrest, according to another senior police officer involved who asked not to be named.
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