Mr Allawi was not in the area at the time of Monday's blast
Sami Mohammad Ali Said al-Jaaf, also known as Abu Omar al-Kurdi, is accused of many bombings, including a blast at the UN headquarters in Baghdad in 2003.
The arrest was reportedly made on 15 January, but not immediately revealed.
A BBC correspondent says one government source played down the significance of the announcement, noting the timing.
Hours earlier, at least 10 people were injured in a suicide bomb in Baghdad, close to interim Prime Minister Iyad Allawi's party offices.
The blast was claimed by Zarqawi supporters in a statement on an Islamist website.
'Major attacks'
The Iraqi government is labelling the arrest of Abu Omar al-Kurdi as a significant victory ahead of Sunday's election.
A government statement said the suspect is accused of building about 32 car bombs since the US-led invasion, including three major attacks in August 2003:
The deadly bombing at the UN headquarters which killed the top UN envoy in Iraq, Sergio Vieira de Mello, and 21 others
A bombing at the Jordanian embassy in Baghdad which killed 11 people
The car bomb at a shrine in the city of Najaf which killed more than 85 people including Shia Muslim leader Ayatollah Muhammad Baqr al-Hakim.
He is also accused of building the car bomb that killed the head of the now-defunct Iraqi Governing Council, Ezzedine Salim, last May.
The government also announced the arrest of a man described as Zarqawi's propaganda chief.
Zarqawi - who tops Iraq's most wanted list - has apparently declared war on Iraq's election.
RECENT INSURGENT ATTACKS 21 Jan: At least 25 people die in suicide car bombings of a Baghdad mosque and a Shia wedding party 19 Jan: US military officials say 26 people die in a series of Baghdad car bombs 17 Jan: At least 16 people die in attacks on security services in northern and central Iraq 11 Jan: At least 15 people die in attacks across Iraq
Will the poll be a success?
Insurgent attacks across the country have made campaigning virtually impossible.
Even the locations of the polling stations will not be announced until the night before the vote, and the massive logistical operation of getting ballot boxes and papers in place will be carried out in secrecy.
The interim government has announced sweeping security measures to protect voters, including extended curfews, traffic restrictions, and shutting Iraq's borders for three days around the poll.
Extra security measures have been announced in Najaf, including the barring of all non-residents from the city for a five-day period.
Chalabi row
In a separate development, Mr Allawi has distanced his government from a row between the Defence Minister, Hazim al-Shalaan, and the leader of the Iraqi National Congress party, Ahmad Chalabi.
Mr Allawi said threats by the defence minister to arrest Mr Chalabi for defamation were unfortunate and not the position of the government.
Mr Chalabi had alleged financial wrong-doing by the defence ministry involving millions of dollars.
Mr Allawi called on both men, who are election candidates, to stop arguing.
Sami Mohammad Ali Said al-Jaaf, also known as Abu Omar al-Kurdi, accused of many bombings, has said to have been captured by US and Iraqi security forces.  He was arrested on the 15th of January, but his arrest has not been revealed until now.

Al-Jaaf was said to have been a threat to security because of his ties to the militant group Zarqawi and his previous criminal record. Interim Prime Minister Iyad Allawi's party offices were close to the site of the recent bombing in Baghdad, these bombings were claimed by Zarqawi supporters on their website, but, luckily, Mr Allawi was not in the area at the time of the blast, which happened on Monday.