Acting on a tip-off, the police raided a house of a businessman in the Esenyurt neighbourhood of Istanbul on the European side of the city and confiscated the artefact, the state-run agency said late Monday.
The dagger, studded with sapphires, emeralds and diamonds, was looted from Gaddafi’s palace during the Libyan revolution, it added.
The businessman planned to sell the dagger on the black market to a Saudi businessmen in Istanbul, it said.
Anadolu quoted officials as saying the Istanbul businessman paid $4.6 million (4.09 million euros) for the dagger, which was purchased from Libya nearly three months ago.
The suspect was detained while trying to sell it to the Saudi businessman for $10 million, it said.
Police detained two other accomplices, according to the agency. They were released pending trial.
Anadolu published an image of the seized artefact showing the finely-crafted dagger embossed with gold and jewels supported on a stand and flanked by two white lions.
Istanbul is a hub for the smuggling of valuable art works and antiques but Turkish police regularly claim success in seizing valuable artefacts that are about to be sold illegally.
Since Gaddafi’s killing in 2011, Libya has descended into near-anarchy, ruled by rival militias vying for power while the Islamic State group has gained influence in the country.