Abdulaziz al-Muqrin who Saudi police shot dead.
Saudi authorities said Abd al-Aziz al-Muqrin was killed with three other wanted terrorists in the capital, Riyadh, while they were trying to dispose of the body.
The raids followed the execution of Paul Johnson, who worked in Saudi Arabia for the aerospace company Lockheed Martin, which makes Apache helicopter gunships.
Video footage of the grisly killing was posted on Islamist websites.
In a fast-moving military operation, Saudi security forces closed in on the Malazz district, a middle-class area of Riyadh.
They reportedly stormed a building - possibly the makeshift prison where Mr Johnson had been held captive - before surrounding the terrorists' car in a Riyadh street.
Authorities said two brothers, Bandar and Faisal Abdul Rahman al-Dakheel, and another terrorist were shot and killed.
Saudi state television last night broadcast pictures of four bodies it said were those of Muqrin and the three other dead militants.
But a website linked to al-Qaeda yesterday denied al-Muqrin had been killed.
"Following the lies about the death of Abd al-Aziz al-Muqrin, we affirm that such allegations, spread by the tyrants in Saudi Arabia, are intended to undermine the morale of the mujahideen," the communique said.
Arabiya television showed footage of police cars and crowds.
A passer-by who saw the three men unloading a body reportedly led police to the terrorists' vehicle.
Muqrin and his companions were killed in an exchange of fire in which a member of the Saudi security forces also died.
President Bush vowed that Mr Johnson's beheading by "extremist thugs" would not blunt the United States' resolve.
"They're trying to shake our will; they're trying to get us to retreat from the world. America will not retreat. America will not be intimidated by these kinds of extremist thugs," Mr Bush told reporters.
In New York, UN Secretary-General Kofi Annan offered his sympathy to Mr Johnson's family, declaring: "These kinds of brutal acts do not help anybody."
In his home town in New Jersey, Mr Johnson's mother, siblings and son grieved in private yesterday, leaving an FBI agent to read a statement in which the family said authorities had done everything within their means to rescue him.
Muqrin's group - the Organisation of al-Qaeda in the Arabian Peninsula - had admitted responsibility for Mr Johnson's beheading, saying it was in revenge for the US-led war in Iraq and the Abu Ghraib prisoner-abuse scandal.
The group warned that other Americans could suffer a similar fate.
An Islamist website showed three pictures of what appeared to be Johnson's severed head. One showed the bloodied head with a knife leaning on the face.
A hooded man purported to be Muqrin, in black garb and clutching an AK-47 rifle, appeared on the site last week saying al-Qaeda would kill Mr Johnson unless authorities released jailed militants within 72 hours. The Arabic script read: "Get the infidel out of the Arab land."
Muqrin took over the leadership of Saudi Arabia's al-Qaeda terrorist network in March this year after the previous leader was killed in a gun battle with security forces.
A long-standing associate of Osama bin Laden, he oversaw his own terrorist network in Saudi Arabia.
Muqrin had praised the killing of Westerners, including the attack in the Saudi city of Yanbu last month, the killing of a German in Riyadh two weeks ago and an attack on US military personnel last Wednesday.
Malazz had been the focus of a huge security search after Mr Johnson was kidnapped and militants shot dead US contractor Kenneth Scroggs last Saturday.
One source said scores of suspected militants had been arrested in the past week.
Mr Scroggs, an American who worked for Advanced Electronics, which manufactures military and commercial electronic products, was gunned down outside his villa.
Earlier, Saudi television broadcast a tearful call for mercy in broken English from Johnson's Thai-born wife, Thanom.
Abdulaziz al-Muqrin who Saudi police shot dead.
Only after we have humanly extracted all the usefull intel. 