The demise of Abdullah Mehsud is a boost to the government, which faces growing U.S. pressure to crack down on Islamic militants battling security forces near the Afghan frontier.
Intelligence agents cornered Mehsud at the home of an Islamist politician in Zhob, a town 260 kilometers (160 miles) from the southwestern city of Quetta, police officials said.
"My information is that Abdullah Mehsud killed himself," Zhob police chief Atta Mohammed told The Associated Press. "Thanks be to God that only he was blown up and our men were safe."
Federal Interior Ministry spokesman Javed Iqbal Cheema confirmed Mehsud's death, but provided no details.
The one-legged militant was released from the U.S. jail for terror suspects at Guantanamo Bay, Cuba, in March 2004 after he was captured in Afghanistan fighting for the Taliban.
He quickly took up arms again, and became a leader of militants in the South Waziristan region on the Afghan border, and was wanted for the kidnapping of two Chinese engineers later that year.
One of the Chinese, who had been working on a dam project, was killed while the other was rescued alive in an operation by Pakistani commandos.
A Pakistani intelligence official said Mehsud was intercepted on his way back from Afghanistan's Helmand province, where the official said he led supporters fighting alongside the Taliban against Afghan and U.S. forces.
The intelligence official, who is not authorized to speak on the record to reporters, said Mehsud had been in Afghanistan for more than a year and that there was no evidence that he organized the recent violence in Pakistan.
Officials said the house in Zhob, where three other men were arrested, belonged to Sheikh Mohammed Ayub and that he was not at home at the time.
Abdul Ghafoor Haideri, a federal lawmaker for the Jamiat Ulema-e-Islam, said Ayub had been expelled from the pro-Taliban party about four months earlier for "suspicious activities and violating party discipline." He declined to elaborate.
Meanwhile, before dawn Tuesday, militants launched fresh attacks on Pakistani troops stationed at roadside security posts in North Waziristan, an intelligence official said. Troops returned fire, triggering gunfights. No casualties were reported, the official said on condition of anonymity because he was not authorized to make media comments.
Militants also detonated dynamite at a municipal office late Monday in Miran Shah, the regional capital, causing damage but no injuries, he said.
Further north, the beheaded bodies of two soldiers abducted the night before were found Tuesday morning in the Bajur tribal area, said Sardar Yousaf, a local government official.
Violence has flared across Pakistan since a deadly military raid on a radical mosque in the capital Islamabad earlier this month. More than 300 people have died, most of them security forces.
Most of the violence has been in North Waziristan, a tribal region where a 10-month-old peace deal with between the government and militants has broken down and the army has redeployed troops backed by helicopters and artillery.
Officials are trying to resurrect the deal, signed in September by tribal elders who pledged to expel foreign militants and stop cross-border raids into Afghanistan.
However, Washington has described the accord as a failure that gave breathing to al-Qaida to regroup - and perhaps plot another big attack on the United States.
Arab, Afghan and Central Asian militants suspected of links with al-Qaida as well as Taliban and local militants operate in North and South Waziristan.
The government has angrily rejected suggestions from U.S. officials that American troops might conduct cross-border raids from Afghanistan on al-Qaida hideouts in the tribal belt along the frontier.