James McConnell was shot dead by two masked men at his home in Woodland Avenue in the Waterside area of the city in February last year.
The INLA said they killed the 38-year-old, who had previously been jailed for possessing cocaine with intent to supply.
The 42-year-old suspect was detained in the Cornshell Fields area of the city.
He has been taken to Antrim police station for questioning about the murder and membership of a proscribed organisation.
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