The 61-year-old, identified only as Gotthard L., was detained on Saturday in the Swiss canton of St Gallen on an international arrest warrant.
He is suspected of helping to develop a gas centrifuge to enrich uranium for use in nuclear weapons over a two-year period from 2001, for which he was paid between four and five million Swiss francs (3.4 million and 4.25 million dollars), a statement from the prosecutors said.
His arrest follows others linked to what investigators believe is a network of mainly Dubai-based engineers who supplied nuclear equipment and know-how to Libya.
The network is believed to be linked to Abdul Qadeer Khan, the Pakistani scientist who admitted this year to supplying nuclear technology to other countries.
Another German man, Gerhard W., was arrested in August and released on bail by German authorities before being re-arrested in South Africa in September.
And last month, German authorities arrested Urs Tinner, a 39-year-old Swiss engineer, on suspicion of involvement in the ring.
Libya announced last year that it was abandoning attempts to develop nuclear, biological and chemical weapons after months of secret negotiations with London and Washington.