The day before the attacks, they transferred money to activate an internet phone account that was used by the attackers and their accomplices, Stefano Fonzi, the head of anti-terror police in Brescia, said.

The attacks in India's economic capital killed at least 166 people and left another 300 injured.

Ten men are believed to have carried out the 60-hour assault.

New Delhi and Washington blamed the siege on Lashkar-e-Taiba, a banned Pakistan armed group.

Alerted by FBI

The two suspects in Brescia, identified in a police statement as Mohammad Yaqub Janjua, 60, and Aamer Yaqub Janjua, 31, are accused of aiding and abetting international terrorism as well as illegal financial activity.

Italian police began the investigation in December after being alerted by the FBI that the money had been sent from Italy, Fonzi said.

The money from Brescia was transferred under the identity of Iqbal Javaid, another Pakistani, who had never been to Italy and was not involved in the attacks, Fonsi said.

The Janjuas ran a money-transfer agency that has now been seized by the Italian police
He lives in Spain and his identity was probably stolen when he used another money transfer agency somewhere in the world, Fonsi told a news conference.

Early in the investigation, suspicions focused on Javaid, but the Janjuas told investigators and the media they did not remember him and did not know his whereabouts.

"They certainly sidetracked the investigation," Fonsi said.

"But we didn't have clear proof that they were aware of what the money was for."

Transferring funds using the identity of other people was a common practice at the Brescia agency, he said.

Two more Pakistanis were arrested in Saturday's raids for allegedly committing fraud and other crimes using the same system, but they were not linked to the Mumbai attacks.

A fifth Pakistani man escaped arrest and was still being sought.

Lashkar connection

India has repeatedly called on Islamabad to charge the founder of Lashkar, Hafiz Muhammad Saeed, with masterminding the Mumbai attacks.

New Delhi has been demanding action against Saeed and other Pakistan-based fighters before it will resume a formal peace process.

Pakistani police announced in September that Saeed would be arrested for propagating jihad and collecting funds for a charity he heads.

Mohammed Ajmal Kasab, the sole surviving suspect, told a court in Mumbai in July that he was one of the attackers.

He gave details of his group's journey from Pakistan on a boat, their subsequent landing in Mumbai, and the rampage that followed as they shot and killed people at a railway station, a Jewish centre and two five-star hotels, including the iconic Taj Mahal.