Sahu, who had twice given the slip to the police, was arrested when he was participating in a motorcycle rally with party supporters at College Square in the district headquarters.
A criminal case had been registered against him on April 10, after the returning officer of Kandhamal verified Sahu's recorded speech at an election meeting.
"Sahu was arrested at Phulbani town," DIG (Southern Range) R P Koche said.
Sahu, also president of state unit of Hindu Jagaran Samukshya (HJS), during electioneering at Raikia on April five had allegedly blamed Christians for the killing of VHP leader Swami Laxamananda Saraswati on August 23, 2008.
Saraswati's killing had led to large-scale violence, which left 43 people dead with hundreds of houses burnt and dozens of churches attacked.
The BJP candidate has been charged under Section 125 of the Representation of Peoples Act, 1951 and section 153 of the IPC for the hate speech.
His arrest was "part of a conspiracy" and he was "framed on false charges", Sahu, a former IPS officer, told reporters immediately after being arrested.
"The voters of Kandhamal will give a befitting reply to the injustice meted to me," he said.
Sahu had earlier said that he would allow the police to arrest him on the last day of campaigning, which is Tuesday.
Sahu had moved the Orissa High Court seeking anticipatory bail in the criminal case and the court was likely to hear his petition on Wednesday.
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