Omar al-Farouq was hunted down more than a year after he embarrassed the US military by making an unprecedented escape from a maximum security military prison in Afghanistan.
He was killed after opening fire on British forces during a raid on his home in Basra.
Al-Farouq was widely believed to be the main link between al-Qaeda leader Osama bin Laden's followers and JI.
A local police officer said the fugitive entered Iraq three months ago, was known to be an expert in bomb making and went by the name Mahmoud Ahmed while in Basra.
Al-Farouq and three other al-Qaeda suspects escaped from a US base at Bagram, central Afghanistan, in July last year, but the Pentagon waited until November to confirm his escape.
The delay upset Indonesia, which had arrested al-Farouq in 2002 and turned him over to the United States.
Al-Farouq and the three other escapees boasted about their breakout on a video broadcast in October last year on Al-Arabiya television.
A top security consultant in Indonesia, Ken Conboy, said al-Farouq joined al-Qaeda in the early 1990s and trained in Afghanistan for three years before unsuccessfully trying to enrol at a flight school in the Philippines so he could commandeer a plane on a suicide mission.
He later plotted to stage car and truck bombings at US embassies across southeast Asia on or near the first anniversary of the
September 11 terrorist attacks, but the plan was thwarted and he was captured, Conboy said.
It was not known why al-Farouq fled to Iraq, but officials have said he was born in Kuwait to Iraqi parents.