Suspected mastermind Imam Samudra confessed on Friday to planning and carrying out the October 12 attack and said he was planning more terror acts, according to Indonesia's national police chief.
Samudra told police a man named Iqbal walked into Paddy's Irish bar wearing what he described as a "jihad bomb." Police say they will carry out DNA testing to confirm that statement.
The bomb tore through Paddy's club, seconds before a much-bigger bomb went off in a vehicle parked in front of Sari's Club, killing at least 180 people.
Samudra told investigators the nightclubs on the resort island were targeted because they were frequented by foreigners, specifically Americans.
The 35-year-old also confessed to a string of bombings that ripped through Indonesian churches on Christmas Day 2000, the police chief said.
Samudra was arrested Thursday in Java as he was about to board a ferry headed for the neighboring island of Sumatra.
His arrest was the biggest breakthrough of the investigation into the October blasts, and authorities now say they are confident his remaining accomplices will be captured soon.
He is believed to be a key member of Jemaah Islamiyah, an Islamic militant group on the U.S. terror watch list with ties to Osama bin Laden's al Qaeda network.
Samudra did not mention the JI group during his interrogations, police said.
It is not known whether he initiated the idea for the attack or did it at the direction of someone else.
Investigators believe Samudra learned bomb-making skills "during visits in Afghanistan," although they did not give further details or say on what evidence that belief was based.
--CNN Correspondent Atika Shubert contributed to this report.