Farooq, 50, a founding member of the Muttahida Qaumi Movement (MQM) party, was stabbed and beaten to death in Edgware, northwest London, as he returned home from work in September 2010.
Critics of the MQM, the most powerful political force in Pakistan's biggest city of Karachi, have claimed that the killing of Farooq was linked to an internal dispute in the party, which has been run from London by exiled leader Altaf Hussain for over two decades.
Interior Minister Chaudhry Nisar Ali Khan told reporters in Islamabad that intelligence agencies had toiled hard on the case for over a year before making their first arrest.
"Our security agencies and police have been trying to arrest a suspect in Imran Farooq's murder for a year," he said.
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The suspect was arrested in Karachi, and is due to appear in court tomorrow, Khan said.
"With the evidence we have, I am confident that there will be quick progress in this case now," he said, adding that security agencies in Britain and Pakistan were cooperating in the investigation.
British police had made two arrests in connection with the killing but both suspects were later freed on bail. They believe that Farooq was under surveillance in the days and weeks before his murder.
Farooq claimed asylum in Britain in 1999. He was wanted in Pakistan over scores of charges including torture and murder related to the MQM's activities, but always claimed the accusations were politically motivated.
He was twice elected an MP in Pakistan, but went into hiding in 1992 when the government ordered a military crackdown against party activists in Karachi.
The MQM has been the most powerful political party in Karachi since the 1990s, and was once seen as close to the country's army, which has ruled the country for half its existence.
But following the raid and today's arrest, some analysts believe the military establishment may now be seeking to reduce the party's influence.