|Fai, held for failing to register as an agent of a foreign government, heads the Kashmir American Council organisation
Pakistan has spent at least $4m since the mid-1990s lobbying the US congress and the White House in a covert attempt to influence American policy on Kashmir, according to an FBI affidavit filed in a US court.
Two US citizens have been charged with illegal lobbying, US authorities said on Tuesday.
FBI agents arrested Syed Ghulam Nabi Fai, 62, in Virginia on charges that he failed to register as an agent of a foreign government.
Zaheer Ahmad, 63, was also charged but is believed to be in Pakistan. Both are naturalised US citizens.
The arrest and allegations may further strain relations between Washington and Islamabad which have been fraught since US forces conducted a secret raid in Pakistan in May that killed al-Qaeda leader Osama bin Laden.
The FBI affidavit detailed the alleged scheme in which Fai's organisation, the Kashmir American Council (KAC), received up to $700,000 annually from Pakistan to make campaign contributions to US politicians, sponsor conferences and other promotions.
"Mr Fai is accused of a decades-long scheme with one purpose - to hide Pakistan's involvement behind his efforts to influence the US government's position on Kashmir," Neil MacBride, US attorney for Virginia, said.
A justice department statement said a witness told investigators that Pakistan's military spy agency, the Inter-Services Intelligence Agency (ISI), created the KAC as a propaganda tool and had been directing Fai's activities for the past 25 years.
He had been in touch with four Pakistani government handlers more than 4,000 times since June 2008, it said.
A US official said the investigation was ongoing and more charges could be forthcoming, but there was no indication Fai had been engaged in spying.
Imtiaz Gul, a political analyst, told Al Jazeera that the allegations seem to be part of an "onslaught" against the ISI for its reluctance or lack-of-cooperation in supporting the US war in Afghanistan.
"It is not a secret that the ISI has been an important element of support for all Kashmiri political and militant groups," he said.
Foreign nationals and governments are banned from making contributions to US campaigns and anyone who lobbies on behalf of a foreign government must register with the US justice department.
Fai, his nonprofit group and Ahmad never registered that they were working for the Pakistani government, US authorities said.
"Mr Fai is not a Pakistani citizen and the government and embassy of Pakistan have no knowledge of the case involving him," a Pakistan embassy spokesperson said.
Fai appeared briefly in federal court in Alexandria, Virginia, where a judge ordered him detained pending a preliminary and detention hearing set for Thursday.
Federal election records showed Fai had given $23,500 to US political candidates since 1997, including $250 to President Barack Obama's presidential campaign as well as $7,500 to Republican representative Dan Burton of Indiana.
'Donate to Boy Scouts'
Husain Haqqani, Pakistan's ambassador in Washington DC, said in a message posted on Twitter that an embassy official was in contact with Fai about an event he organised with US officials and scholars, but that the FBI "does not allege embassy involvement or knowledge" of his alleged activities.
Burton, an outspoken critic of India's actions in India-administered Kashmir, said in a statement that he was "deeply shocked" by Fai's arrest and "had no inkling of his involvement with any foreign intelligence operation".
"If there is any doubt about the origin of these contributions, I will donate those funds to the Boy Scouts of America," he said. Burton said he had known Fai for 20 years.
The justice department said that there was no evidence that any elected officials who received the contributions from Fai or his group knew that it came from the Pakistani government.
Control over Kashmir has been at the centre of hostilities between India and Pakistan since their partition in 1947.
The nuclear-armed rivals have fought two of their three wars over the territory.