Mustafa al-Barghuthi was detained on Tuesday while campaigning in the Arab quarter of east Jerusalem and was taken for questioning to a local police station.
Israeli police also forced Hanan Ashrawi, a prominent Palestinian member of parliament, to stop electioneering on Tuesday as she was canvassing for votes in east Jerusalem.
A statement on behalf of al-Barghuthi read: "Dr Barghuthi was meeting with ordinary Jerusalemites near Damascus Gate, discussing their needs and the situation of Palestinians in east Jerusalem, when he was approached by six undercover Israeli security agents, arrested, and taken to the Russian Compound jail where he remains under detention."Ashrawi told reporters she had decided to launch her campaign in Jerusalem "because it is the capital of Palestine and an occupied city".
The disturbances came as parties officially launched campaigns for what will be the second Palestinian parliamentary election.
However, there are doubts whether the vote will take place if Israeli officials do not allow voters in east Jerusalem to cast their ballots.
The ruling Fatah movement, which has governed for the past decade, launched its campaign by the tomb of the late president Yasser Arafat in Ram Allah.
Meanwhile, Fatah's chief rival, Hamas, staged its launch from its Gaza Strip stronghold.
Hamas is hoping to exploit public
disillusionment with Fatah
Buoyed by a strong showing in recent municipal elections, Hamas is fielding parliamentary candidates for the first time after boycotting the previous election.
It is expected to campaign heavily on an anti-corruption ticket, exploiting widespread disillusionment among voters over the perceived incompetence of the current administration.
The failure of the Palestinian president, Mahmoud Abbas, to assert control has been illustrated in recent months in the Gaza Strip, where armed men operate above the law and kidnappings are increasingly common.
Four Europeans were kidnapped in the past week, and the kidnappers of three Britons, who were released unharmed, have threatened to abduct European Union monitors unless a number of demands, including that voting can take place in east Jerusalem, are met.
Dozens of EU monitors have arrived in the major towns to oversee the vote, but say they will make hourly assessments of the security situation.
Having initially said that the Palestinian residents of occupied east Jerusalem will not be able to cast ballots, Israeli officials, under pressure from the United States, have now said they will "contemplate" allowing voting.
Abbas has said he will call the election off if the residents of east Jerusalem are denied the chance to take part.
Mahmoud Abbas is on a tour of
the Arab Gulf states
"If [east Jerusalem] is not included, [Palestinian] factions are unanimous that there will be no election," he told Aljazeera on a visit to Doha.
Other senior Fatah members, such as Ahmad Qureia, the outgoing prime minister, have demanded that the elections should be postponed because of the security situation and the uncertainty in Jerusalem.
Such demands partly reflect bitterness among the Fatah old guard over the line-up of candidates.
Surveys indicate that many voters are undecided and could opt for smaller parties or independent candidates such as al-Barghuthi.