Police confirmed they captured 22-year-old Robert E. Crimo III, who was from the area. They said he was driving a silver 2010 Honda Fit.
Charges will be filed, Highland Park Police said.
The shooting caused toddlers to abandon tricycles and parents to run for safety with their children, turning a civic display of patriotism into a scene of panicked mayhem.
"It sounded like fireworks going off," said retired doctor Richard Kaufman, who was standing across the street from where the gunman opened fire, adding he heard about 200 shots.
"It was pandemonium. A stampede. Babies were flying in the air. People were diving for cover," he said.
"People were covered in blood tripping over each other."
More than 36 people were hurt, mostly by gunshots, said Jim Anthony, a spokesman for the NorthShore University Health System.
The 26 victims taken to Highland Park hospital ranged in age from eight to 85, said Brigham Temple, an emergency room doctor.
The New York Times named one of the dead as 76-year-old Nicolas Toledo, who was in a wheelchair and had not wanted to attend the parade, but his disabilities required he be around someone full time and his family had not wanted to miss the event.
"We were all in shock," his granddaughter Xochil Toledo said. "We thought it was part of the parade."
At least one of those killed was a Mexican national, a senior Mexican Foreign Ministry official said on Twitter.
The shooting comes with gun violence fresh on the minds of many Americans, after a massacre on May 24 killed 19 children and two teachers at a primary school in Uvalde, Texas, which followed a May 14 attack when 10 people were gunned down at a grocery store in Buffalo, New York.
Children waving flags, riding tricycles or enjoying a ride in a wagon pulled by adults froze as people in the crowd screamed while gun shots rang out, video on social media showed.
One mobile phone video, seen but not verified by Reuters, recorded what sounded like about 30 rapid shots, a pause, and then another roughly 30 shots.
Between the two bursts, a woman can be heard saying: "My God, what happened?".
The Lake County Sheriff's office posted an online wanted poster of Crimo, showing a thin-faced bearded man with facial and neck tattoos.
Crimo appears to have published several self-made rap songs using the stage name Awake The Rapper.
A video by Awake The Rapper shows a drawing of a stick figure holding a rifle in front of a another figure spread on the ground.
YouTube terminated an associated user account, after police named Crimo.
The rap videos show a man looking like Crimo. A YouTube official did not immediately respond to a request for comment.
Police said the shooting took place from the rooftop of a business the gunman reached via an unsecured alley ladder attached to the building.
President Joe Biden said he and his wife Jill were "shocked by the senseless gun violence that has yet again brought grief to an American community on this Independence Day".
In his statement, Biden referred to bipartisan gun-reform legislation he signed recently but said much more needed to be done and added: "I'm not going to give up fighting the epidemic of gun violence".
Amarani Garcia, who was at the parade with her young daughter, told ABC she heard gunfire, then a pause for what she suspected was reloading, and then more shots.
There were "people screaming and running. It was just really traumatising," Garcia said.
"I was very terrified. I hid with my daughter actually in a little store. It just makes me feel like we're not safe anymore."
Highland Park's population is 30,000 and nearly 90 per cent white, according to the US Census Bureau. About a third of the population is Jewish, according to the Jewish Telegraphic Agency.
