The Kenyan government confirmed that Michael Adebolajo was detained in 2010 under a false name and handed over to British intelligence agents.
"He was arrested under a different name, a fake name," government spokesman Muthui Kariuki told AFP.
"We did not process him, he was handed over to the local MI5."
A Kenyan anti-terrorism police officer said Adebolajo was arrested and questioned over links to the Shebab insurgents.
The Shebab are an al Qaeda linked group fighting in Somalia, but with ties in neighbouring nations including Kenya's Indian Ocean coastal region.
The officer, speaking on condition of anonymity, said Adebolajo had been detained because he had been in contact with other suspects that Kenyan police were tracking in the port city of Mombasa.
"There was no evidence to nail him so he was released. He was interrogated both in Mombasa and Nairobi," the officer told AFP.
The Kenyan government rejected allegations made by a friend of Adebolajo that he had been assaulted while being held in Kenya.
The spokesman said "senior members of the intelligence community... denied knowledge of the torture ordeal".
A man said to be Adebolajo appears in a photograph showing him in the dock of a Kenyan court after his arrest in 2010.
Reports in Britain said he was detained on the island of Pate, a few kilometres away from Lamu, which is a crossing point to Somalia.
The disclosure raises fresh questions about the monitoring of Adebolajo and the other suspect in the murder, 22-year-old Michael Adebowale, by Britain's intelligence services.
Adebolajo was captured on video carrying bloodied knives and a meat cleaver after Wednesday's attack saying he had killed off-duty soldier Lee Rigby because British troops were killing Muslims.
Anti-terror investigators in France meanwhile were probing the stabbing of a soldier in Paris as he patrolled a busy shopping centre and transport hub on Saturday afternoon.
The soldier was stabbed in the neck but was said to be in a stable condition in hospital.
President Francois Hollande said no link to the grisly murder in London had been established "at this stage", but the French interior minister said there were similarities.
The family of Lee Rigby paid an emotional visit to the scene of his murder near his barracks in Woolwich, southeast London, and added their bouquets to an ever-growing pile of of floral tributes.
The two men accused of hacking him to death remain under armed guard in separate hospitals after they were shot by police at the scene.
It also emerged that Adebowale was arrested in London two months ago after local traders complained about a group of Muslim activists.
In Britain, armed police arrested three more men in their 20s on Saturday on suspicion of conspiracy to murder.
Officers also searched four properties in London.
Both the suspects in the murder are Muslim converts from Nigerian Christian families, raising concerns in Britain about the radicalisation of young men.
Home secretary Theresa May, the interior minister, warned there were "potentially" thousands of people at risk of being radicalised as she indicated plans for a fresh crackdown on extremist groups.
May said around 500 police and intelligence officers were working on the "horrific murder" of the soldier, but "all the indications" pointed to a lone wolf-style incident rather than a wider planned operation.
In Paris, counter-terrorism investigators were handling the probe into the stabbing of soldier Cedric Cordier as he patrolled the La Defense district.
President Hollande said authorities were still piecing together information on the bearded attacker, who melted into the crowd without a word after the stabbing.
"We still do not know the exact circumstances of the attack or the identity of the attacker, but we are looking at all options," Hollande said during a trip to Ethiopia.
He cautioned against drawing a link to the London killing, but interior minister Manuel Valls said: "There are elements, the sudden violence of the attack, that could lead one to think there could be a comparison with what happened in London."
The attack was captured by surveillance cameras.