"Karadzic was located and arrested," Serbian President Boris Tadic said on Monday night.
His arrest, which comes after the election of a pro-European government in Serbia last month, was welcomed by the EU.
"This news gives us immense satisfaction. The new government in Belgrade stands for a new Serbia, for a new quality of relations with the EU," European Union foreign affairs chief, Javier Solana, said.
Karadzic vanished in 1996 after being indicted by a UN tribunal for war crimes and genocide.
He was charged with genocide over the 1995 Srebrenica massacre, the largest mass murder in Europe since the end of WWII. Some 8,000 Muslim men and boys were killed by Serb forces in Srebrenica in July 1995 under the command of Ratko Mladic, who remains at large.
Karadzic was also held responsible for the deaths of 12,000 people during the almost four-year long siege of Sarajevo.
Crowds gathered on the streets of Sarajevo, now the capital of Bosnia and Herzegovina, to celebrate the news of Karadzic's arrest.
However, Karadzic's lawyer told reporters that his client was in fact arrested on Friday night on a bus in the outskirts of Belgrade, and that he had been in custody for three days before his arrest was announced to the public. The former Bosnia Serb president turned 63 on Saturday.
Serbian media reported that Karadzic had also claimed that he was arrested on Friday rather than Monday. He is also reported to have called his arrest "a farce".
The Serb authorities will make public the circumstances of Karadzic's arrest on Wednesday, when police and prosecutors are set to meet.
"We congratulate the government of Serbia, and thank the people who conducted this operation for their professionalism and courage," the White House said in a statement.
However, Serbian nationalists predicted that Karadzic's arrest would cause a "backlash."
"Karadzic is a Serbian hero," said Aleksandar Vucic of the Radicals, a leading Serbian political party.
The EU had made the arrest of Karadzic one of the main conditions for accepting Serbia into its ranks.
