Hayyari's name was at the top of a list of 36 Al-Qaeda suspects announced by Riyadh last week. The ministry said he had helped prepare explosives and had played a part in several attacks on targets in Saudi Arabia.
"He was recently nominated by his colleagues to be the leader of strife and corruption in the land, after the death of his predecessors," the statement said.
Interior Minister Prince Nayef said the operation was the result of extensive surveillance by Saudi security forces, and pledged to pursue other suspected militants.
"God willing, we will reach the rest using the same method," he told journalists after visiting wounded security forces in hospital.
Successive leaders of the Saudi wing of Al-Qaeda have been killed since security forces launched a crackdown in 2003 and Saudi officials say their replacements are increasingly inexperienced. But Western counterterrorism experts say Al-Qaeda has shown a resilience and ability to regenerate.
One other man was arrested at the scene of the clash and two others surrendered without a struggle in a simultaneous police raid in the same district of eastern Riyadh. Six policemen were lightly wounded, the ministry said.
Prince Nayef described Hayyari as a "dangerous man" but said others on the wanted list were as dangerous. The three captured men were not on the wanted list, he added.
Last week, Saudi Arabia issued the new wanted list of Al-Qaeda suspects - most of whom were Saudis but some were from Chad, Yemen, Morocco and Mauritania.
It offered a bounty of up to 7 million riyals ($1.87 million) for anyone who helped authorities capture a militant or foil a planned attack.
The killing of Hayyari means that the network's local branch is now "brain-dead" after successive killings of hardcore leaders, a prominent Muslim cleric said.
But while the group's militants still on the run do not compare to the likes of their notorious predecessors, many of whom have been killed or captured, they remain "dangerous as individuals, rather than as an organization," Sheikh Mohsen al-Awaji said.
But Faris bin Hizam, an expert on Saudi terror groups, warned that the next few weeks would likely see more violence.
"We shouldn't be surprised if more clashes erupt. Clearly the Interior Ministry has information about the militants, and they will go after them," he said.
Washington-based counterterrorism expert Evan Kohlmann also expected an upsurge in the violence.
"I think Al-Qaeda in the kingdom may be going into a new period of activity. They were dormant for a long, long time, and suddenly they've become active. I don't think Hayyari's death will end it. There are additional individuals who are being trained in Iraq, crossing back and forth into Saudi Arabia. The Saudis should be really worried right now," he said. - Agencies
Younis Mohammad Ibrahim al-Hayyari, who was believed to be one of the top leaders of Al-Qaeda, died after exchanging fire and hurling hand grenades at Saudi Arabian police in Riyadh. Hayyari's name was at the top of a list of 36 al Qaeda suspects announced by Riyadh last week. The ministry of the Interior said he had helped prepare explosives and had played a part in several attacks on targets there.

Saudi Arabia has been battling suspected al Qaida militants for two years since May 2003, when they launched their campaign of violence with triple suicide bombings at expatriate housing compounds in the Riyadh. Successive leaders of the Saudi wing of al Qaida have been killed since 2003 and Saudi officials say their replacements are increasingly inexperienced. But Western counterterrorism experts say al Qaida has shown a resilience and ability to regenerate.