Mohammad Javed, the 26-year-old regional head of Jamaatul Mujahideen Bangladesh (JMB)'s explosive unit, was arrested along with four other members in the southeastern port city of Chittagong as part of an intensified anti-militancy security campaign.
"After a night long interrogation Javed led a police team to a house saying they have stored some weapons there. As our detectives entered the house, Javed exploded a grenade," Chittagong ACP Babul Akhter told PTI.
A cache of weapons was also seized from the hideout of the outlawed group accused of carrying out a series of deadly blasts in 2005 that claimed at least 25 lives.
Nine hand grenades, 120 rounds of ammunition, pistols, knives and a large quantity of bomb-making materials were seized, according to police.
Also Read
The development came as the authorities intensified an anti-militancy campaign following last week's killings of an Italian and a Japanese national, claimed by the dreaded Islamic State.
Earlier, killings of four secular bloggers including a US citizen in the Muslim-majority nation had sparked international condemnation.
JMB came to prominence after two of its operatives were killed on October 2, 2014, apparently in an accidental blast at a hideout in Kolkata's Burdwan area, near the border with Bangladesh.
The blast had triggered a security alert on both sides of the border with high-level visits by senior officials from each side. Several JMB activists were arrested both in India and Bangladesh in connection with the incident.
Six top JMB militants, including the group's chief Shaikh Abdur Rahman and second-in-command Siddiqul Islam 'Bangla Bhai', were executed in 2007 after a trial in Bangladesh.