Sayyed Abbas Tublani (47) was arrested by the Anti-Extortion Cell (AEC) of the crime branch, they said.
The journalist-turned-activist S Balakrishnan had earlier complained to police of being threatened by Dawood's henchman Chhota Shakeel in run up to the auction held in December last.
He had also received a threatening sms from the gangster, police said.
Balakrishnan, however, went ahead with his plan and eventually won the bid to acquire hotel Rounaq Afroz at Bhendi Bazar area on Pakmodia Street in South Mumbai for Rs 4.27 crore.
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Without taking Balakrishnan's name, he said the complainant has also applied for extending deadline to deposit the amount.
Tublani was booked under various sections of IPC for criminal intimidation and hatching a criminal conspiracy.
Police also recovered two mobile phones and some SIM cards which were alleged used by Tublani to talk with the fugitive gangster.