The move came days before a visit to Washington by Prime Minister Imran Khan, who has vowed to crack down on militant groups operating in Pakistan.
Pakistan authorities on Wednesday arrested Hafiz Saeed, the alleged mastermind of a four-day militant attack on the Indian city of Mumbai in 2008, on terror finance charges, a spokesman for the chief minister of Punjab said.
Saeed, designated a terrorist by the United States, is the founder of Lashkar-e-Taiba (LeT), or Army of the Pure, the militant group blamed by the United States and India for the Mumbai attacks, which killed more than 160 people.
He has denied any involvement and said his network, which includes 300 seminaries and schools, hospitals, a publishing house and ambulance services, has no ties to militant groups.
Journalist Kamran Yousaf reports from Islamabad.
A spokesman for Punjab Governor Shahbaz Gill said Saeed was arrested near the town of Gujranwala in central Pakistan.
"The main charge is that he is gathering funds for banned outfits, which is illegal," the spokesman said.
Pakistan, which is included on the so-called "grey list" of the Financial Action Task Force, a money laundering and terror finance watchdog, has been under increasing pressure to stop the financing of militant groups.
However an Indian government official said that merely arresting Saeed was not enough and that he should be put on trial and convicted.
"We want real action, not these kind of steps that are reversible. One court orders his arrest, another frees him," said the official, who has close knowledge of diplomatic issues with Pakistan.
He said the sense in New Delhi was that Pakistan was taking steps such as these before Khan's trip to the United States, which has offered a $10 million reward for information leading to Saeed’s conviction over the Mumbai attacks.
"We have seen this before," the official said. "After the visit is over, things are usually back to what they were before."