British military spokesman Major Charlie Burbridge said Omar Faruq was killed when he resisted arrest during a predawn raid in Al-Basrah.
The United States described Faruq as a senior Al-Qaeda figure.
Faruq escaped from the Bagram air base in Afghanistan about one year ago.
Faruq, a Kuwaiti citizen, was arrested in Indonesia in 2002. He was believed to be a link between Al-Qaeda and the Jemaah Islamiyah militant group in Indonesia.