Pearl, 38, a reporter for The Wall Street Journal, disappeared in the southern city of Karachi on Jan. 23 as he tried to contact radical Islamic groups, and trace links between Osama bin Laden's al Qaeda network and alleged shoe-bomber Richard Reid.
Twenty-eight-year-old Ahmad Omar Saeed Sheikh, also known as Sheik Omar Saeed, is believed by police to have provided pictures of Pearl in captivity. They were sent to news organizations five days after the reporter disappeared. head of a militant group with confirmed ties to al Qaeda.
Among items Karachi police found in raids was Saeed's phone number, reports CBS News Correspondent Barry Petersen.
They reportedly called Saeed directly on Wednesday, telling him they had arrested members of his family as a bargaining chip, offering their release in exchange for Pearl.
Saeed said, in essence, to do nothing and Pearl would be free within hours.
Instead, Saeed used those hours not to arrange Pearl's release, but to make his own getaway. Now police are admitting their investigation has faltered.
[ Reuters reports that Brigadier Mukhtar Ahmed, home secretary of Pakistan's Sindh province, has denied there were any negotiations between the government and the kidnappers, insisting there had been no contact apart from two e-mails.]
Saeed has been a suspected hostage taker before. He was arrested in 1994 in India in connection with the kidnapping of four backpackers, including one American, in Kashmir.
While Saeed was never brought to trial for the kidnapping - undertaken to demand the release of Islamic militants fighting Indian rule in Kashmir - he spent the next five years in an Indian prison.
He was freed along with two other militants on Dec. 31, 1999 in exchange for passengers of an Indian Airlines flight hijacked to Kandahar, Afghanistan.
As head of a militant group with confirmed ties to al Qaeda, Saeed is described as brilliant, and more than willing to sacrifice innocent lives for his cause.
In a raid Sunday night, police detained three people and seized a laptop belonging to one of the residents, Farhad Naseem, according to police Inspector Qamer Ahmed.
The inspector said the two e-mails were recovered from Naseem's laptop. Ahmed admitted receiving them from Saeed, the Muslim militant.
The owner of the service provider, Naeem Ahmad, said Naseem had erased his files and browser but had neglected to clean his hard drive, which contained the messages.
Investigators say they have no idea where Pearl is being held, but were concentrating the search on Karachi, Lahore and Islamabad.
In the week following his disappearance, police received two e-mails from the previously unknown National Movement for the Restoration of Pakistani Sovereignty, threatenig to kill Pearl if the United States did not release its prisoners from the Afghan war.
Both e-mails contained photographs of Pearl in captivity, one showing him bound in chains with a gun to his bowed head -- an apparent reference to photographs of al Qaeda prisoners held at a U.S. naval base in Cuba.
The kidnappers said Pearl was being kept in "inhumane" conditions to protest the treatment of the U.S. prisoners in Cuba.
Police said they had made another arrest in the capital Islamabad Thursday in the hunt for Pearl's kidnappers, but said the investigations could easily drag on.
"It could take an hour, a day, maybe a week," said a senior member of the investigation team. "We don't know yet."
Despite not having heard anything from Pearl's abductors for more than a week, police said they were hopeful the U.S. reporter was still alive somewhere in Pakistan.
"We have no reason to believe he is dead," a senior investigator told Reuters. "Look at it logically. ... These people have made demands, what good will it do them if he is dead?"
"It is too early," agreed Jameel Yousuf, chairman of the Citizens-Police Liaison Committee, an organization run by private businessmen with years of experience in investigating kidnappings in Karachi. "Why go to all this trouble (to kidnap Pearl) if they were just going to kill him?"
Yousuf said he believed Pearl would soon be freed, as police close in on his abductors.
"In the past, whenever we have identified a gang member, the victim has been released. ... If they release him they can go quietly underground, but if they kill him the manhunt will never end."
Police said they believed the criminals had gone silent because they knew the net was closing in, but said they remained optimistic about Pearl.
"If they sent photographs of him alive, they could send photographs of him dead," said another senior officer. "We are hopeful he is alive."
The kidnapping has been embarrassing to the government of President Pervez Musharraf, which broke with Afghanistan's former Taliban rulers after the Sept. 11 terrorist attacks and backed the United States in the war against terrorism.
Last month, Musharraf banned five Islamic extremist groups, including Jaish-e-Mohammed. Pakistani authorities hope to solve the case before Musharraf visits the United States next week.
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