Assad Ahmad Barakat was arrested in Foz de Iguazu, a city in the border region between Brazil, Argentina and Paraguay, according to police.
He has frequently faced accusations of illegal activity in the region – known as the Triple Frontier – which is also considered a haven for smuggling, trafficking and counterfeiting.
In 2004, the US Department of the Treasury said Barakat was one of the most influential members of Hezbollah, which the US considers to be a “terrorist” organisation, and accused him of using his businesses in the tri-border area as fronts for raising funds for the group.
Barakat, a Lebanese national, has been wanted by Paraguay since late August on charges of falsifying documents, Brazil’s police said.
Earlier this month, Brazil’s supreme court authorised Barakat’s arrest, saying his case met the requirements for an arrest and possible extradition.
According to Brazilian police, Argentine authorities froze assets belonging to Barakat and his associates after they were suspected of laundering some $10m in a casino on the Argentine side of the border.
Barakat was previously extradited from Brazil to Paraguay in 2002 and returned to Brazil upon his release in 2009.
It was not clear whether Barakat will again be extradited to Paraguay following Friday’s arrest.
US authorities and others alleged the lawless border region between the three countries is a hotspot for support and funding of armed groups.
The Treasury Department ordered a freeze on Barakat’s US assets, and in 2006 it branded him as a “global terrorist”, including his name on a list of people in the Triple Frontier it believed were financing Hezbollah. US companies and citizens are prohibited from financial dealings with Barakat.
In 2001, he told The Associated Press news agency he was a Hezbollah sympathiser, but denied supporting terrorism.
Hezbollah is a political party and armed group based in Lebanon and backed by Iran that operates across the Middle East.
According to the Counter Extremism Project, an NGO, Barakat arrived in Paraguay in the mid-1980s having fled Lebanon during the country’s bloody civil war, and was also involved in planning Hezbollah’s military operations – including the 1994 bombing of the AMIA Jewish community centre in Buenos Aires.