A senior ED source said Merchant was arrested under the sections of the Prevention of Money Laundering Act (PMLA), 2002 and will be produced before a Mumbai court later in the day.
The source said Merchant was arrested after several property deals, including those related to Patel, on behalf of Mirchi and his family members were found routed through him.
On Friday, the ED had grilled Patel for over 12 hours about who the promoters of Millennium Developers were, whether he had ever meet Merchant and if he had travelled to London during 2006-07.
The ED action is based on documents, unearthed during the probe, which show that Millennium Developers, promoted by Patel and his wife Varsha, developed the 15-storeyed Ceejay House in Mumbai and then gave two floors of the building to Mirchi's family members in 2006-07.
The ED has unearthed deals worth Rs 225 crore related to three buildings - Sea View, Marium Lodge and Rabia Mansion - spread over 1,573 square metres in Worli area of Mumbai.
Last week, the agency arrested Ranjeet Singh Bindra and Haroun Yusuf, two close aides of Mirchi, from Mumbai.
According to the ED, while Bindra acted as a broker for the land deals, Yusuf facilitated them by transferring the money to a Trust.
Yusuf became a British national in 2004 and played a crucial role in carrying out illegal deals between Mirchi and real estate developers, which were fixed by Bindra for brokerage of around Rs 30 crore.
( With inputs from IANS )