The suspect, 34-year-old Mario Roensch, was detained in an early morning raid on his Budapest home by Hungarian anti-terror officers.
Prosecutors said he is “strongly suspected” of running the far-right website Migrantenschreck (Migrants' fright) between May and November 2016, which according to German media called on citizens to “arm themselves against refugees”.
“He is believed to have illegally sold 193 permit-requiring firearms to buyers in Germany,” the statement from the Berlin prosecutor's office read.
They added that Hungarian police searched two properties in connection with the probe, and seized computer hard drives as evidence.
Public broadcasters NDR and WDR said Roensch, who had been on the run from German authorities, was detained under a European arrest warrant.
They also reported that the weapons allegedly sold by the suspect – earning him around €100,000 – fired rubber bullets of the kind “that could cause serious injuries and kill people”.
German media said Roensch was also thought to have close links to the notorious far-right Anonymous.Kollektiv Facebook page and the online portal Anonymousnews.ru, known for spreading anti-Islam and anti-Semitic content.
The Berlin prosecutors said their investigation was ongoing and that they were now awaiting Roensch's transfer to Germany.