Iraq's defence ministry said it had broken up an al-Qa'ida cell that was working to produce poison gas for attacks within the country as also in Europe and North America.
The announcement comes as it emerged that Iraq last month witnessed the worst violence in years, stoking fears of a steep escalation of sectarian strife.
The group of five people had built two facilities in Baghdad for the production of sarin and mustard gas, using instructions from another al-Qa'ida group, according to government spokesman Mohammed al-Askari.
According to Askari, the members of the cell had been prepared to launch attacks domestically, and also had a network to smuggle the toxins to neighbouring countries, and further afield to Europe and North America.
The arrest of the cell members was possible due to co-operation between Iraqi and foreign intelligence services, he added.
According to the UN, sarin nerve gas might have been used by rebels in their fight to overthrow president Bashar al-Assad in neighbouring Syria.
The death toll in Iraq last month stood at over 600, according to officials, while the UN said it was over 1000 with either toll estimate making it the deadliest month since 2008.
The wave of violence comes following 18 months of the US troops leaving Iraq. The troubled country has neither been secure nor stable over a decade following the US-led invasion of the country.
A count by the news agency Agence France Presse, based on information from security and medical sources, put the toll last month at 614 people killed and 1550 wounded, while data from government ministries showed 681 had died and 1097 were wounded.
The UN's toll figures stood significantly higher at over 1045 killed and 2397 wounded.
Top political and religious figures assembled last weekend for a gathering that had been called for since late 2011, but continually delayed.
Prime minister Nuri al-Maliki, a Shi'ite, embraced his main sunni political rival, speaker Osama al-Nujaifi, in a move symbolising an aim to reduce tensions in the country.
No tangible measures were announced though and more meetings are scheduled for later.
Meanwhile, according to the BBC, remote-controlled toy planes, which had been seized at two workshops in Baghdad could have been meant to be used in the attacks.
Between October 2006 and June 2007, Al Qaeda, detonated 16 chlorine bombs in Iraq, the broadcaster said.
The forces of former Iraqi dictator, Saddam Hussein, killed an estimated 5,000 people in a poison gas attack on the Kurdish town of Halabja in 1988.
Askari said the planes were to have been used to release the chemical agents over the target from a "safe" distance of 1.5km (1 mile), BBC's Rami Ruhayem frported from Baghdad.
He added, the arrested men had confessed to the plot adding they had received instruction from another al-Qaeda offshoot.
The BBC correspondent added, that Iraqi TV showed footage of four men with black hoods on their heads, as the defense ministry spokesman spoke. Three were clad in bright yellow jumpsuits while the fourth wore a brown jumpsuit.