The Rome resident, a former frame-maker, told detectives he received the work in 1978 as a thank you gift for an act of kindness towards a recently bereaved customer.
A widower had come into his shop in a state of distress after breaking a photo frame in which he kept a picture of his lamented late wife. Touched, the frame-maker replaced the glass for free.
Two days later, the elderly customer returned to the workshop and presented him with the Picasso, without giving any indication of its value or artistic significance.
The painting is a representation of a violin and a bottle of Bass beer which police experts have authenticated as a 1912 work by the Spanish artist, then at the height of his Cubist phase.
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The police became interested in it last year when auction house Sotheby's, who had been instructed by the pensioner, attempted to secure a state authorisation to export it with a declared estimated value of 1.4 million euros.
That triggered an investigation during which police were able to identify the work as corresponding to one mentioned in a 1961 edition of the Zervos, a catalogue of Picasso's work which is considered the definitive guide to the Spanish artist's prodigious output.
The iconic British beer, once the most widely drunk in the world, also puts in an appearance in impressionist Edouard Manet's 1882 painting A Bar at the Folies-Bergere.
The specialist police unit which deals with crimes related to art works and cultural artefacts unveiled two other significant seizures today, including a Roman sculpture dating from the second or third century which has an estimated value of eight million euros.