The general, accused of orchestrating the massacre of 8,000 Muslim men and boys in the town of Srebrenica and a brutal 43-month siege of Sarajevo during Bosnia´s 1992-5 war, was found in a farmhouse owned by a relative, a police official said.
"Mladic was handcuffed and whisked away," said the official, who said Mladic had been cooperative during the arrest.
A friend of the Mladic family said he had been put on a plane to the international war crimes tribual in The Hague, but Serbia said he was still in its custody.
"On behalf of the Republic of Serbia I can announce the arrest of Ratko Mladic. The extradition process is under way," Serbian President Boris Tadic told reporters in Belgrade.
Tadic confirmed Mladic, 69, had been detained in Serbia, which had long said it could not find a man who was armed and funded by the late Serbian president Slobodan Milosevic and is still seen as a hero by many Serbs.
"This removes a heavy burden from Serbia and closes a page of our unfortunate history," Tadic said.
Mladic was arrested in the village of Lazarevo, near the northeastern town of Zrenjanin around 100 km (60 miles) from the capital Belgrade in the early hours, the police official said.
Psuedonym
Bosnian Muslim survivors said the news was bittersweet.
"I have been waiting for years for this criminal, who gave himself the right to take away my children and force me out of my town, to face justice," said Kada Sehomerovic, who lost her husband, son and two brothers when Bosnian Serbs under Mladic seized Srebrenica, designated at the time as a "UN safe area".
A Mladic family friend earlier told Reuters Mladic had been taken to the headquarters of the Serbian intelligence agency after an interior ministry official said police had arrested a man going by the name of Milorad Komadic on an anonymous tip.
The European Union said Mladic´s arrest would show that Serbia, which was under international sanctions over the war in Bosnia and then bombed by NATO to stop atrocities in Kosovo in 1999, wanted to move forward on European Union membership.
"This is an important step forward for Serbia and for international justice," European Union foreign policy chief Catherine Ashton Ashton said in a statement.
"We expect Ratko Mladic to be transferred to the International Criminal Tribunal for the former Yugoslavia without delay. Full cooperation with the ICTY remains essential on Serbia´s path towards EU membership," she added.
The Mladic family friend said Mladic had left Serbia for The Hague by plane on Thursday afternoon. "They sent him immediately," the friend, who did not want to be named, told Reuters. "It is a security risk to keep him in Belgrade."
Many Serbian nationalists idolise Mladic and one representative made clear their fury with the government.
"This shameful arrest of a Serb general is a blow to our national interests and the state," Boris Aleksic, a spokesman for the ultranationalist Serbian Radical Party said. "This is a regime of liars -- dirty, corrupt and treacherous."
Dozens of people were arrested and injured in 2008 throughout Serbia in riots following the arrest of Bosnian Serb wartime political leader Radovan Karadzic.
Tadic said he would not allow a repeat of such violence.
"This country will remain stable," he said. "Whoever tries to destabilise it will be prosecuted and punished."
Washington and other capitals hailed the arrest.
"The European prospects of Serbia are now brighter than ever," said Swedish Foreign Minister Carl Bildt.
"Serbia is a country that has suffered a lot but the fact it has delivered presumed war criminals is very good news. It´s one more step towards Serbia´s integration one day into the European Union," French President Nicolas Sarkozy said at a Group of Eight summit in France.
Serbia´s dinar currency rose more than one percent on the news, which Tadic said opened the way for reconciliation in the Balkans region, still recovering from the conflicts that tore apart old federal Yugoslavia in the 1990s.
NATO Secretary-General Anders Fogh Rasmussen said Mladic played a key role in some of the darkest episodes of Balkan and European history and called his arrest "an important step towards a Europe that is whole, free and at peace".
Although it removes a diplomatic thorn from Serbia´s side, the revelation that Mladic was in Serbia, as many suspected, raises questions as to how he eluded justice for so long.
