The Italian tactician left the 21-year old out of his World Cup squad for last June's tournament in South Africa because he was not match fit but says he possibly made a mistake with his non-selection.
Walcott has scored six league goals this season in eight starts for the Gunners and Capello feels the speedy attacker is getting back to his best ahead of the February 9 friendly with Denmark in Copenhagen.
"I am really happy that Theo is back. He is playing how I remember when he started to play with us," Capello said.
"It was a tough decision leaving Theo out for the World Cup. He played only a few games before the end of the season and was not the same player we knew.
"Instead, he played every time with fear in the tackle. He was not able to win back the ball quickly and then when he turned, his movement was not fast like it is now.
"Even when I decided not to pick him for the squad, I still thought he would be one of the players I would think about a lot after the World Cup, because he could play 25 minutes and be dangerous.
"I made a mistake not selecting him. He is so fast that he can make the difference in every moment. I should have taken him."