Nadal was in Paris for the French Open, which he won Monday for a record seventh time, beating Serbia's Novak Djokovic.
Luxury watchmaker Richard Mille had lent the Spanish tennis champion the watch. It vanished sometime late Monday to early Tuesday.
A police source—speaking on condition of anonymity, citing policy—said Wednesday that the pricey timepiece was found Tuesday night along a railway track in the southern Paris suburb of Evry.
The suspect in the case, a 39-year-old barman who worked at the luxury hotel in Paris' 8th district, was arrested Tuesday evening.