A well-known critic of President Paul Kagame, Rusesabagina had been living outside Rwanda – first in Belgium and then Texas – since 1996.
Police did not say where he was apprehended.
In handcuffs and a facemask, Rusesabagina, 66, was shown to the press in Rwanda’s capital, Kigali, on Monday by police.
He has not yet been formally charged in court.
“Through international co-operation, the Rwanda Bureau of Investigation wants to inform the general public that Paul Rusesabagina has been arrested,” police said.
“Rusesabagina is suspected to be the founder, leader, sponsor and member of violent, armed, extremist terror outfits including the Rwanda Movement for Democratic Change (MRCD) operating out of various places in the region and abroad,” police said.
There was an international arrest warrant for Rusesabagina to answer charges of serious crimes including terrorism, arson, kidnap and murder, perpetrated against unarmed, innocent Rwandan civilians on Rwandan territory, police said.
Police told the media in Kigali that investigations against Rusesabagina will continue and more information will be released about his alleged activities.
Rusesabagina has previously denied the government’s charges that he financially supports Rwandan rebels.
Rusesabagina has been a prominent critic of Mr Kagame’s government, calling it a dictatorship and urging Western countries to press the government to respect human rights.
Government supporters reject Rusesabagina’s criticism, saying Mr Kagame’s leadership supports democracy and economic growth.
Rusesabagina has won numerous international honours including the United States Presidential Medal of Freedom, which President George W Bush awarded him in 2005.
Mr Kagame disputes Rusesabagina’s story about saving survivors at a hotel in Kigali, the capital, during the genocide, in which more than 800,000 Tutsi and Hutus who tried to protect them were killed by Hutus.
“Rusesabagina has been among the most prominent critics of the Rwandan government and an opponent to President Kagame. His arrest will definitely weaken those who oppose Kagame’s leadership,” Gonza Muganwa, a Rwandan political analyst said.
The 2004 film Hotel Rwanda showed Rusesabagina, a Hutu married to a Tutsi, as using his influence as a manager of the Hotel des Mille Collines, to allow more than 1,200 Tutsis to shelter in the hotel’s rooms.
Naphtal Ahishakiye, executive secretary of Ibuka, a Rwanda survivors’ organisation, said that Rusesabagina’s arrest is good news for survivors of the genocide. Mr Ahishakiye said Rusesabagina had charged people money to be able to survive in the hotel.