Mohammed Saleem, 75, was stabbed to death on April 29 in Birmingham, central England, as he was on his way home from a local mosque.
West Midlands Police said a 25-year-old Ukrainian man who was already in custody had been formally arrested today over Saleem's murder.
The killing, which was first treated as a racist murder but then unexplained, is now being treated as an "act of terrorism" and part of a wider counter-terror investigation, the force said.
There has been a rise in anti-Muslim incidents in Britain since May, when a soldier was hacked to death on a London street in a suspected Islamist attack.
The explosion at the mosque in Tipton on July 12 coincided with the funeral of 25-year-old Lee Rigby, who was murdered in broad daylight near his barracks in Woolwich, southeast London.