The body was removed from a shallow grave on property Pakistan state television said was owned by Al-Rashid Trust, a group the United States has identified as a terrorist organization.
The body was found near a blood-spattered shed where authorities believe Pearl was held before his videotaped murder. In the shack, police found a car seat that resembled one in pictures sent to news agencies by Pearl's kidnappers, chief investigator Mansour Mughal told The Associated Press.
Samples of blood on the walls of the shed were taken for DNA testing, Mughal said. A jacket resembling the track suit Pearl was photographed wearing was found buried in the grave with the body, he said.
The body was cut into 10 pieces, including a severed head, Mughal said.
It could be a week before the results of DNA tests are known, Police Chief Kamal Shah told reporters in Karachi.
Police were told where the body could be found by three new suspects arrested Thursday. Pakistan television identified the three as members of the outlawed Lashkar-e-Janghvi, a radical Islamic group with links to al-Qaeda whose members were suspected of taking refuge in Afghanistan during the Taliban rule.
The body was found barely 500 yards from a large Islamic religious school, Jamia Rashidia, that was founded by Mufti Rashid, the same man who began Al-Rashid Trust.
The United States froze the assets of Al-Rashid Trust after accusing it of being a conduit for money to al-Qaeda to finance international terrorism.
Shah, the Karachi police chief, refused to confirm whether police suspect al-Qaeda involvement in Pearl's kidnapping and murder, but he didn't rule it out.
"I don't want to reveal my cards yet," he told reporters. "To say anything now would be like putting the cart before the horse."
According to Mughal, the chief investigator, the shed resembled the background in photographs of Pearl.
"We think this is the room where Pearl may have been held for two or three days," Mughal said.
So far, the three newest suspects have not been formally charged. Police say they believe the men were among seven being sought in connection with Pearl's disappearance and death.
Four Islamic radicals have been on trial since April 22 on charges of murder and kidnapping in the case. They have pleaded innocent. Chief prosecutor Raja Quereshi refused to comment about how the latest developments would affect his case, saying it was too early to tell.
Wall Street Journal spokesman Steve Goldstein also declined comment. Pearl's wife, Mariane, is nine months pregnant and expecting her first child in days.
The 38-year-old Pearl disappeared Jan. 23 from outside a restaurant in Karachi while researching possible links between Pakistani extremists and Richard C. Reid, who was arrested in December on a flight from Paris to Miami with explosives in his shoes.
A gruesome three-minute video was delivered to U.S. officials in Karachi on Feb. 21 showing Pearl's death.
In Friday's proceedings, the judge put off until Tuesday a decision on a prosecution request to send a panel to Britain to videotape testimony from Pearl's wife.
The judge also rejected a prosecution request to recall a handwriting expert, who in earlier testimony linked two of the suspects to handwritten drafts of e-mails later sent by the kidnappers. Quereshi, the prosecutor, said he might appeal.
After his disappearance, e-mails with photos of a captive Pearl were sent to foreign and local news publications. They were signed by a previously unknown group demanding better treatment for the suspected Taliban and al-Qaeda men being held in Guantanamo Bay Naval Base, Cuba.
U.S. investigators traced the e-mails to one of the four men on trial, Fahad Naseem, who in turn identified British-born militant Ahmed Omar Saeed Sheikh as the mastermind, police said. Naseem's cousin, Salman Saqib, and former policeman Sheikh Mohammed Adeel are also on trial.
The trial, which resumes Saturday, is closed to reporters, who have to rely on defense attorneys and prosecutors for details of the proceedings.