Aides to Mustafa al-Barghuthi said he was taken into custody while meeting Palestinians in Jerusalem's Old City, which Israel seized in the 1967 Arab-Israeli war and annexed as its capital in a move not recognised internationally.
Palestinian sources said al-Barghuthi was detained by heavily-armed border policemen who drove him to the Russian Compound lock-up in West Jerusalem.
"The police told him: 'We have an arrest warrant for you', and dragged him away," Ihad al-Jariri, campaign manager for the independent candidate, said.
Israeli police did not immediately comment on the arrest, the second such incident for al-Barghuthi, one of seven Palestinians running in 9 January presidential elections in the West Bank and Gaza Strip.
Earlier this month, al-Barghuthi said Israeli troops had harassed him, beaten him and briefly detained him at a checkpoint outside the West Bank city of Jenin.
The army alleged that al-Barghuthi and his entourage had refused to submit to a routine car search.
Another candidate, Bassam al-Salhi of the communist People's Party, was also harassed and detained after trying to enter Jerusalem without a permit.
Though wary of Palestinian resistance fighters, Israel has pledged to ease its clampdown in the West Bank and Gaza so candidates can move freely. But Jerusalem remains an especially sensitive jurisdiction.
Al-Barghuthi has been harassed
in the past and is now arrested
Israeli leaders have vowed not to allow Palestinian candidates to make any "electioneering expressions" in open and public places in order to assert Israeli claims of sovereignty over the occupied town.
Palestinians want the holy city to be a shared capital of their future state. Israel has ruled this out, but said East Jerusalem Palestinians can take part in the elections as absentee voters.