Early on Monday morning, residents spotted the 31-year-old unnamed man armed with a knife, naked and covered in blood.
He was running down the main road in Erbach in the central German state of Hesse, police said.
Alarmed residents alerted police, who launched a manhunt.
They eventually tracked him down to the town's marketplace with the help of a police helicopter.
He was arrested and taken to a psychiatric clinic.
Police said they believed the blood had come from injuries he had inflicted on himself, but said they would investigate further.
Although this time police were able to arrest the man without a struggle, the case is reminiscent of an incident a year earlier in June 2013.
Then, police shot dead a naked man who had been cutting himself in the fountain on Berlin's Alexanderplatz with a large knife.
When approached by police, the man reportedly lunged at an officer, who shot him in the chest. The disturbed man later died of his injuries.