Sabar Lal Melma, who was released from Guantanamo in 2007 after five years of detention, had been organising attacks in eastern Kunar province and funding insurgent operations, NATO spokesman Capt. Justin Brockhoff said.
A NATO statement described Melma as a "key affiliate of the al-Qaeda network" who was in contact with senior al-Qaeda members in both Afghanistan and Pakistan.
Troops surrounded Melma's house in Jalalabad city last night and shot him dead when he emerged from the building holding an AK-47 assault rifle. Several other people were detained.
A guard at the house, Mohammad Gul, said a group of American soldiers scaled the walls of the compound around 11 pm local time and stormed the house, shooting Melma in the assault. Three others were detained, Gul said.
Melma had been detained for about five days in August, Gul said.
Melma is not the first former detainee to rejoin the insurgency. In 2009, the Pentagon said 61 detainees, or approximately 11 per cent, released from Guantanamo had rejoined the fight. Experts have questioned the validity of that number.
About 520 Guantanamo detainees have been released from custody or transferred to prisons elsewhere in the world. After the fall of the Taliban, Melma, 49, was given the rank of brigadier general and placed in charge of approximately 600 border security troops in Konar province, according to his military file made public by WikiLeaks.
He was captured in August 2002 while attending a meeting with US military officials in Asadabad and transferred to the US prison at Guantanamo Bay in October that same year.
He was suspected of helping carry out rocket attacks against US troops.
While imprisoned at Guantanamo Bay, the US determined he was a "probable facilitator for Al-Qaeda members" and was also thought to have links to Pakistan's intelligence service.
He was sent back to Afghanistan in September 2007.
NATO said in a statement that coalition forces have captured or killed more than 40 al-Qaeda insurgents in eastern Afghanistan this year.
In June 2010, then CIA Director Leon Panetta said only 50 to 100 al-Qaeda operatives continued to operate inside Afghanistan. It's not clear if Panetta was referring to commanders or foot soldiers