The 58-year-old was found hiding behind a car parked in a garden in the Fern Park area of the city in the early hours of Wednesday. He was detained on suspicion of murder.
He was wanted by police in connection with the fatal shooting of Barry McCrory in Derry city centre last Thursday morning.
Police caught McLaughlin, who was armed, at around 3am. No shots were fired during the operation, which began after the suspect was spotted in the Republic of Ireland.
Gardaí followed a silver vehicle until it crossed the border, at which point the PSNI took over. The car was subsequently abandoned and another vehicle was taken.
Police dogs, a helicopter with heat-seeking equipment and specialist firearms officers were used by police during the operation in a bid to capture the suspect.
He was found hiding under a car in a driveway at a house in the Galliagh area, when he was detained.
A senior PSNI officer said he was carrying "two handgun-type firearms and a shotgun".
"It was potentially dangerous and we had to engage a range of specialist, for example firearms specialists," Chief Superintendent Stephen Martin said following the arrest.
"We had very strict command protocols and arrangements in place and so we were well aware of the risks."
It was our job to locate Mr McLaughlin and safely bring him into custody and I'm grateful that we've got the solution that everyone would have wanted.
Chief Superintendent Stephen Martin
Army bomb squad officers are currently carrying out follow-up searches in the Ederowen Park area of Galliagh in case there are further firearms. Several homes have been evacuated.
Local politicians and family members had appealed for Kieran McLaughlin to make contact with police after he went on the run seven days ago.
It followed the death of Barry McCrory, who was killed by a gunman in a top-floor flat on Shipquay Street in what police described as a "brutal execution".
His partner, who was in the house at the time of the shooting, was forced into another room before the 35-year-old was shot dead. She escaped uninjured.
Mr McCrory was laid to rest at St Joseph's Church, Galliagh on Tuesday.
McLaughlin's arrest was the culmination of a six hour operation by security forces on both sides of the Irish border.
Last week, armed Gardaí swooped a house in Burnfoot in Co Donegal, not far from Derry, as part of a joint operation to detain him.
PSNI later confirmed they had received reports of sightings of McLaughlin in Derry city.
Sinn Féin councillor Elisha McCallion, of the Galliagh area, said: "People in the community are relieved that the overnight police operation has ended peacefully.
"A number of people have been moved from their homes this morning due to a suspect car but we have been assured that it will be cleared as soon as possible."
West Tyrone Ulster Unionist MLA Ross Hussey said: "This manhunt has been ongoing for some time now and has involved joint operations by the PSNI and Garda on both sides of the border.
"The two forces have demonstrated once again that they are well capable of working together for the benefit and protection of citizens in both Northern Ireland and the Republic and deserve the thanks and support of the entire community."
Pat Ramsey, SDLP MLA for Foyle, said: "I am sure that everyone in the City, especially the McLaughlin family, has breathed a huge sigh of relief that no one else was harmed. This was a difficult time for the City so I am really pleased that it has been resolved successfully."