Officials say that Imam Samudra confirmed to them that he did know the man known as Hambali - reputed to be the leader of the Jemaah Islamiah (JI) militant Islamic group and a regional al-Qaeda leader.
National police chief Da'i Bachtiar said: "At the beginning he denied knowing Hambali, but when we showed him the evidence, he finally admitted to knowing Hambali. He met him in Malaysia."
Officials investigating last month's Bali bombing, which killed more than 180 people, said earlier this week that they had found speeches by al-Qaeda leader Bin Laden in a house rented by Imam Samudra.
Correspondents say authorities hope Imam Samudra will be able to provide information on the whereabouts of Hambali - whose real name is Riduan Isamuddin.
Both Imam Samudra and a man called Amrozi - also under arrest in connection with the Bali bombing - attended a religious school in the 1990s in Malaysia run by Hambali.
Blasts blame
Hambali has been accused of involvement in bombings across the region, as well as having given logistical or other support for the 11 September attacks on New York and Washington and the earlier blast which killed 17 American sailors on the USS Cole warship.
Al-Qaeda has been blamed for the 11 September and Cole attacks.
However, police have not proved any links between al-Qaeda or JI and the 12 October Bali bombing.
Imam Samudra
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Indonesian officials hope the interrogation of Imam Samudra will confirm what involvement, if any, al-Qaeda had with the attacks on the Bali nightclubs which appeared to be aimed at Western tourists.
A message apparently from Bin Laden which was broadcast earlier this month welcomed the Bali bombing as a continuation of a series of raids which included the New York, Washington and Cole attacks.
Police have already said that Imam Samudra admitted planning the Bali bombing.
Thirteen men, in addition to Imam Samudra and Amrozi, have been arrested in connection with the attack on the Sari Club and Paddy's Bar on 12 October.
The Indonesian authorities are seeking DNA evidence of Imam Samudra's claim that the blast in Paddy's Bar was a suicide attack by a man named Iqbal.
If the claim is true, it would mark the first time such an attack has taken place in Indonesia.
On Tuesday, Malaysia's police chief admitted that his country had detained Muslim militants who claimed to be members of a suicide bomb squad.
He did not give details, but an unnamed Malaysian official told the Associated Press that three men who were under arrest and claimed to be suicide bombers were involved in a plot - foiled in December 2001 - to blow up Western embassies in Singapore.
The official claimed the arrested men were under the direct control of Hambali.