Abu Talha, acting leader of Jamayetul Mujahideen Bangladesh (JMB), was arrested last night along with seven members of the outlawed group after a raid in the capital, Dhaka, police said in a statement.
Talha took over as JMB head after police arrested his father and then leader in 2010, while his brother was also arrested in 2005 for being a senior member.
The JMB grabbed headlines the same year after it carried out synchronised blasts across the country to push its cause for the creation of an Islamic state in Muslim-majority Bangladesh.
Police also blamed the outfit for a series of deadly attacks on Sufi shrines.
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Dhaka police said JMB was trying to regroup, after a major crackdown by authorities, by reaching out to the Islamic State militant organisation and Al-Qaeda.
"During interrogation, they admitted to contacting Islamic State organisation and Al-Qaeda in the Middle East in an effort to establish Islamic state in Bangladesh," the statement said.
The eight also admitted under questioning that they were planning to attack unnamed high-profile Bangladeshis and key infrastructure in the country, police said.
Although radical Islamist groups have struggled to make headway in Bangladesh, a recent spate of killings of secular bloggers has sparked fears of growing radicalisation among some Bangladeshis.