Ayatollah Mohammad Kazemeini Boroujerdi was detained with several of his followers, Iran's student news agency ISNA quoted Abdollah Rowshan, the deputy governor of Tehran, as saying.
Etemad-e Melli newspaper said an estimated 200 protesters formed a cordon around Boroujerdi's house to call for the release of several of Boroujerdi's followers.
Police used teargas to disperse the crowd in southern Tehran, newspapers said on Sunday.
Seday-e Edalat reported that the crowd lit fires to stop police from approaching the house.
A picture showed police in riot gear lined up near a crowd of people in the street.
"All the people, including Boroujerdi, who ... caused this issue, were arrested," Rowshan, who is in charge of security and political affairs, was quoted as saying.
Police arrested some of the protesters for carrying knives and guns, the Tehran governor's office said in a statement.
The Iranian authorities are wary of challenges, particularly from senior clerics, to the system of clerical rule that was established after the 1979 Islamic revolution by Ayatollah Khomeini.
"We believe that our nation is tired of political religion and they want to return to traditional religion," Boroujerdi told Iran's labour news agency ILNA on Saturday.
He said he had written to Kofi Annan, the UN secretary-general; Javier Solana, the European Union foreign policy chief; Pope Benedict; and other leaders asking them "to make efforts to spread traditional religion", ILNA reported.
A senior police officer was quoted as saying Boroujerdi claimed to be a representative of the 12th Imam, who Shias believe has been hidden by God but will emerge as the ultimate saviour of mankind, and this prompted some people to make donations to him.
"This is misinterpreting religion and is sheer lies," the police officer was quoted by Seday-e Edalat as saying.
Iran has an elected president and parliament but final authority lies with the supreme leader, currently Ayatollah Ali Khamenei, according to velayat-e faqih, the system of rule by a religious legal scholar that was introduced by Khomeini.
The supreme leader is chosen by an assembly of elected clerics.
Some Shia clerics believe that religious leaders should not have a political role.