Antonio Pelle had been on the run for five years after escaping from hospital in 2011 and was on the Interior Ministry's list of most dangerous mafia fugitives.
He was found on Wednesday in a secret room between the bathroom and his son's bedroom at his home.
Pelle had been serving a 20-year-prison sentence for mafia association and arms and drug trafficking when he escaped from the hospital in Locri, a town in Reggio Calabria, where he had been receiving urgent medical treatment for anorexia, Gazzetta del Sud reported.
Fifty police searched the two-storey home, but police commander Francesco Ratta told Italian broadcasters " it wasn't easy, it took a very attentive eye to discover his hiding place."
A video distributed by police (below) shows Pelle peering out from behind a cupboard. He appears shocked by their discovery of his hideout, and after talking to police, he climbs down and does not attempt to resist arrest. The room contained a bed and some cash.
Pelle had first been arrested - in a different underground bunker - in 2008.
The 54-year-old fugitive is considered to be the head of the Pelle-Vottari clan, part of the 'Ndrangheta, the Calabrian mafia. A feud between the Pelle-Vottari clan and rival Nirta-Strangio clan put Italy's largest organized crime group in the global spotlight in 2007, when a feud left six dead in an Italian restaurant in Duisburg, a small town in western Germany. In total, the feud between the gangs has claimed at least 20 lives.