The charge against Syed Ghulam Nabi Fai of the Kashmiri American Council alleges he is an unregistered agent of a foreign government.
The US Justice Department says he donated millions to a Washington nonprofit in a secret lobbying effort led by Pak intelligence to influence US policy on disputed Kashmire.
Kashmiri separatist leader Syed Ali Shah Geelani on Wednesday insisted Fai was innocent and called the allegation the "result of India's diplomatic efforts and conspiratorial plans."Both Fai and Geelani have openly opposed India's heavy-handed rule and argued that Kashmiris should vote themselves to decide the territory's final status.
"Mr. Fai has been active for last 32 years highlighting the plight of his people," Geelani said.
"Because of his unflinching advocacy of the Kashmire cause at the international level, he had become an eyesore for India."
Another separatist group, the pro-independence Jammu-Kashmire Liberation Front, also condemned the US charge as going against the democratic path of nonviolence Fai advocated.
"His arrest is against ideals of democracy and peaceful reconciliation. This is also against the US government's approach and thinking."
India's police chief in Kashmire said Fai's arrest followed years of suspicions.
"He has been figuring in lots of things in the past, like ... the diversion of ISI funds for anti-national activities in India and particularly in Jammu and Kashmire," Kuldeep Khoda said.
The US Justice Department says in court documents that Fai --directed by a top member of Pakistain's spy agency Inter-Services Intelligence, or ISI --donated millions of dollars to US political campaigns, wrote newspaper op-eds, organised congressional trips and met with White House and State Department officials.
Geelani urged Kashmiris to protest Friday and "foil the Indian designs to weaken the Kashmiri struggle."
He said that, unless Fai was freed, Kashmiris "will lose their faith in the international community."