Iqbal was taken into custody from his house in Nagpada area in Central Mumbai by a team led by encounter specialist and the anti-extortion cell's senior police inspector Pradeep Sharma, an official said.
"Iqbal was brought for questioning in connection with an extortion case. After investigation, he was found to be involved in the case and arrested," the official said.
Some more arrests were likely during the night as five more persons were detained in connection with the extortion case, he said.
The businessman then approached the Anti-Extortion Cell of Thane Police with a complaint.
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Acting on the complaint this evening, Sharma's team went to Nagpada and took Iqbal into custody.
Iqbal, who was deported from the United Arab Emirates in 2003, is said to be operating his brother's real estate business in the city, the police said.
He was wanted in a murder case and the Sara Sahara illegal construction case. However, he was acquitted in both the cases in 2007.
Sharma, who led the team that detained Kaskar, was suspended in Lakhan Bhaiya encounter case and was recently reinstated in the police force.