The Metropolitan Police would only confirm that a man in his 60s had been held in an investigation into speeches related to his MQM party.
Mr Hussain, 65, requested asylum in the 1990s and later gained UK citizenship.
Despite a split in the MQM, he still wields considerable influence in the party and its main power base, Karachi.
Pakistan’s powerful but absent politician.
Correspondents say Mr Hussain is a maverick politician who has encouraged a personality cult to build up around him.
His arrest was confirmed by his spokesman, Qasim Raza.
The Muttahida Qaumi Movement (MQM) has dominated politics in Karachi for three decades because of its support in the densely populated working class neighbourhoods of Urdu-speaking Muhajirs, descendants of Muslims who migrated from India when Pakistan was created in 1947.
From his self-imposed exile in London, Mr Hussain would address crowds of supporters of his MQM party in Pakistan via telephone.
The Pakistani authorities have repeatedly demanded action be taken against him – but his supporters have always maintained his innocence.
What does the Met statement say?
It does not name Mr Hussain, referring instead to “an individual associated with the Muttahida Qaumi Movement in Pakistan”.
He was arrested at an “address in north-west London… on suspicion of intentionally encouraging or assisting offences contrary to Section 44 of the Serious Crime Act 2007”. The man remains in custody.
Two premises are being searched, in an investigation led by the Met’s Counter Terrorism Command.
It focuses on “a speech broadcast in August 2016 by an individual associated with the MQM movement in Pakistan as well as other speeches previously broadcast by the same person”.
What is the MQM?
1984: Founded as the party of Urdu-speakers who migrated from India at the time of the 1947 partition, known as Muhajirs
1988: Wins all seats in Karachi, becoming Pakistan’s third largest party
1992: Altaf Hussain leaves the country after an arrest warrant is issued in a murder case; army claims to have busted “torture cells” used by MQM activists to punish opponents
2009: Under a 2009 amnesty in Pakistan 72 cases are dropped against Altaf Hussain, including 31 allegations of murder
2015: MQM wins local government election with a huge margin in Karachi