A southern Italian court ordered the 29-year-old man's arrest for conspiracy to commit international terrorism and inciting others to break the law, they said in a statement.
Catanzaro Chief Prosecutor, Nicola Gratteri, said Italian authorities were forced to intervene because they believed the man posed a definite threat.
"We were afraid, as has already happened on other occasions, that the subject might leave Calabria to carry out a terrorist attack," Gratteri added.
Italian police said the extremist attempted to convince other asylum seekers living in a state-funded shelter in the city of Crotone, in Calabria, to "perpetrate acts of violence with terrorist objectives", and argued that those who do not follow Islam "should have their throats cut”.
"The Iraqi - considered violent and inclined toward criminal activity - had celebrated after the recent terrorist attack in Manchester," police added.
In a recorded telephone conversation between the arrested man and his sister, he said he had been called to join the "holy war" in his country, but had decided instead to stay in Italy to "redeem the infidels" with the use of violence.
The case will fuel Italy's increasingly bitter political debate over citizenship laws and the management of boat migrant arrivals ahead of a national election early next year.
Over the weekend, around 1500 migrants were pulled from overcrowded dinghies off the coast of Libya and are now being brought to Italy by rescue vessels.
Italy currently bears the brunt of Europe's migration crisis, especially after the migrant route to Greece was blocked off.
500,000 people have migrated to Europe via Italy in the past three years, and almost 200,000 asylum seekers are living in Italian shelters as they await their destiny.
With ANSA/Reuters
