Francis Mackey, 44, was detained at the Tyrone & Fermanagh psychiatric hospital, on the outskirts of the town, where he works as a nurse, and taken to a Royal Ulster Constabulary station in Londonderry for questioning.
His home at the village of Mountfield, seven miles from Omagh, was also searched.
Family members refused to make any comment, but political associates claimed the arrest was an attempt by the British and Irish governments to silence republican critics of the Northern Ireland peace agreement.
His party is linked to the Real IRA, the dissident republican group which carried out the car bombing six months ago.
Mr Mackey's detention brought to six the number of men held in custody in Northern Ireland in connection with the atrocity.
Another three were detained yesterday in the Crossmaglen and Cullaville areas of south Armagh in a huge security swoop which involved police and troops.
Detailed searches of homes and nearby property were also carried out.
The men are all being held at Strand Royal Ulster Constabulary station in Derry.
Three more men are being interviewed in Monaghan after raids in the border areas of the Irish Republic.
Two others held in Carrickmacross have been released.
Twenty-nine people were killed and 350 injured by the car- bomb explosion.
Mr Mackey, an independent councillor in Omagh, where he has resisted public demands for him to quit and leave the town because of his party's Real IRA connections, can be held under the Prevention of Terrorism Act for up to seven days without being charged.
He split with Sinn Fein because of his opposition to the leadership's peace strategy of Gerry Adams and Martin McGuinness.
Uniformed RUC officers detained him in the hospital grounds just after 8am.
A spokesperson for the Sperrin Lakeland Trust, which manages the hospital where he was detained, said: "It is our policy not to comment on individual members of the staff."
Senior RUC and Garda officers who have been involved in an unprecedented cross-border inquiry to try to track down the bombers have identified at least six men they believe were directly involved in the 15 August attack.
It is understood that they have also established where the 450lb-500 lb bomb was assembled and the route the terrorists took to transport it into Omagh from the outskirts of the town before abandoning the red Vauxhall Cavalier car in Market Street.
Mr Mackey's party insisted that the arrest was an attempt by the British government and the Republic's Taoiseach, Bertie Ahern, to silence opponents of the Good Friday peace deal and switch attention away from the deadlock on decommissioning, which is threatening to delay the setting up of an executive at the Northern Ireland Assembly.
Vice-chairman Bernadette Sands McKevitt claimed: "The cynical timing of these arrests cannot be overlooked."
She added: "We call all those who support freedom of speech and the right of free political thought to condemn this latest wave of harassment."
The Conservative Party's shadow Northern Ireland minister, Andrew Mackay, was in Omagh yesterday to meet survivors and relatives amid claims that families are not getting adequate financial compensation.
One of them, Laurence Rush, 57, whose wife, Libby, was among the 29 dead, said last night that he yearned for the day when the terrorists responsible were eventually jailed. He said: "I want a just vengeance. God allows me a vengeance. He allows me to feel like this because my wife of 40 years contributed to this country by having three fine children. "These people (Real IRA) destroyed that.
"They destroyed the fabric of this town and this country. Young people have been left without limbs. These people have got to be brought to justice.
"I hope my prayers will be answered. We have to find the killers of our wives and loved ones. Omagh is our home town. Its the place where we live and where we brought up our children.
"It might not be the most beautiful town in the world, but it can be made into that at a spiritual level."Reuse content