Police cautioned that the fugitive was "armed and dangerous" and told the public to alert authorities if he was seen. French police arrested Gagliano in Menton, just over the Italianborder, interior minister Angelino Alfano said on Twitter.
The 55-year-old Gagliano, who the courts have declared is mentally ill, earned his nickname in February 1989 when he killed his third victim on Valentine's Day after breaking out of a psychiatric hospital.
In 1983, he escaped from a separate institution where he had been confined for murdering a woman and then held a family hostage and was recaptured only after a shoot-out with police.
Because he was let out on leave despite previous escapes ending in violence, justice minister Annamaria Cancellieri was asked to testify before parliament on Friday, before Gagliano was captured.
"I don't doubt that the affair has alarmed the public... I intend to take charge of discovering what happened," Cancellieri told parliament, saying she would lead a "fact-finding inquiry".
She denied reports that the prison director was not aware of Gagliano's criminal history when the pass was issued.