The Punjab Counter Terrorism Department (CTD) on Saturday arrested Zakiur Rehman Lakhvi, leader of proscribed organisation Lashkar-e-Taiba (LeT), in an intelligence-based operation from Lahore, a spokesperson for the CTD said in a statement.
Lakhvi was running a medical dispensary to collect and disburse funds for financing terrorism, it added.
"He & others also collected funds from this dispensary and used these funds for further terrorism financing. He also used these funds for personal expenses," the statement read.
A case of terrorism financing was registered against Lakhvi by the Punjab CTD at its Lahore station, it said, adding that his trial would be held before an anti-terrorism court in Lahore.
As leader of the banned militant group, Lakhvi is blamed by the United States and India for the 2008 Mumbai attacks.
A UN Security Council sanctions committee says Lakhvi is LeT's chief of operations and accuses him of being involved in militant activity in a number of other regions and countries, including Chechnya, Bosnia, Iraq and Afghanistan.
Indian authorities said the lone surviving gunman in the 2008 Mumbai siege, in which 166 people were killed, had told interrogators before his execution that the assailants were in touch with Lakhvi.
India has long called on Pakistan to bring Lakhvi to trial, but Islamabad says Delhi has not provided concrete evidence to try the LeT leader. He was first arrested in 2008 but was later released on bail.
Imran Gill, Lakhvi's lawyer, confirmed the arrest and told Reuters his case would be heard next week. He did not respond to further questions.
Another man that India says was the mastermind of the Mumbai siege, Hafiz Saeed, was arrested after being convicted by an anti-terrorism court on two charges of terrorism financing last year. Saeed denies involvement in the Mumbai attacks.
Additional reporting by Reuters.