Saif al-Islam, Colonel Gaddafi's son and the heir apparent, has been captured, according to officials from the National Transitional council (NTC).
Gaddafi was reportedly arrested in the town of Obari, near Sabah in the south of Libya by militia forces. Reports suggest that Saif and his colleagues were ambushed.
According to Reuters, the European Union has urged Libyan authorities to make sure Gaddafi stands trial at the international criminal Court (ICC).
The 39-year-old captive is wanted by the ICC for crimes against humanity; however the NTC has yet to confirm whether Gaddafi will be handed over to international authorities or made to stand trial in Libya.
Luis Moreno Ocampo, a prosecutor for the ICC said: "The good news is that Saif al-Islam is arrested, he is alive, and now he will face justice."
Marek Marczynski of Amnesty International also urged the NTC to transfer Gaddafi to the court in the Netherlands:
"The ICC has an arrest warrant out for him and that is the correct thing to do. He must be brought before a judge as soon as possible," he said. "It matters for the victims. What they need to see is true justice. They need to know the truth about what happened."
However, Libya's Information Minister Mahmoud Shammam reacted to Saif's capture by calling him an outlaw who "should be tried in front of the Libyan Court, by Libyan people and by Libyan justice".
A picture of Gaddafi apparently inured appeared on Facebook shortly after reports of his capture. Saif's fingers are believed to be bandaged from wounds sustained a month ago in an air strike.
He is expected to be transferred to the mountain town of Zintan until the NTC decide his fate. Three armed aides were captured alongside Gaddafi.
Reports suggest that the son of former intelligence chief Abdullah al-Senussi, who is also wanted by the ICC, was part of the group arrested.
Across the desert state, Libyans took to the streets to celebrate Saif's arrest.
The news comes a month after Saif's father, Muammar Gaddafi, was caught and lynched in the town of Sirte.
Speaking to Reuters, Justice Minister Mohammed al-Alagy confirmed: "We have arrested Saif al-Islam Gaddafi in (the) Obari area."
Speaking on Libyan TV, Bashir Thaelba, a Zintan commander, confirmed Saif's capture, adding: "We hope at this historical moment that the future of Libya will be bright."