The man, named only as Peter W., 67, had been on the run for 21 years after being charged in the United States with supplying Iran with 115 tons of chemicals used to produce lethal mustard gas in the late 1980s, the Austrian daily Kronen Zeitung reported.
"The arrest took place in Hall, in Tirol on December 28th," criminal police spokesman Alexander Marakovits told news agency AFP, confirming the newspaper report.
"Peter W. travelled to Austria with a false Irish passport and was here under a false name, but investigators were still able to find him," he added.
"He appears to have felt safe in Austria and it took him by surprise when he was arrested." The arrest resulted from a joint operation by Austrian criminal police, local Tirol police and US authorities, Marakovits said.
W., who had travelled to Austria with his family, is currently being held in Innsbruck until the court rules whether to extradite him. It is unclear when the decision will be made.
According to Marakovits, US investigators had been tracking W. for years. He was arrested in Croatia in 1994 but the court decided there was not enough evidence to keep him and he fled to Germany.