Tunda is believed to have helped plan and execute 40 blasts in India.
Abdul Karim Tunda, the senior terrorist from the Lashkar-e-Taiba or LeT arrested on Friday, claims he was handled by Hamid Gul, the former chief of Pakistan's spy agency, sources in the Delhi Police said.
They added that in 48 hours of interrogation, Tunda, 70, has shared crucial information on how the Pakistani establishment is funding and inciting terror attacks in India.
Hamid Gul, who retired in 1989 as chief of the Inter-Services Intelligence Agency, denied the allegations.
Speaking to NDTV, Hamid Gul said, "Not at all. I left ISI in June 1989 and retired from military service in 1992. I had nothing to do with ISI in 1995. And ISI would never handle a man like Tunda. I don't recall and I have a good memory. No possibility that I met him ever."
Tunda allegedly claims that he met Hamid Gul for the first time in 1995, and that the ISI runs a massive operation to print fake Indian currency which is used to sponsor terror attacks in India. He said the main players in the counterfeit racket are Major Tayib, Major Altaf and Major Iqbal - his interrogators say these could be code names or people actually working for the Pakistan army
Till he was arrested on the India-Nepal border late on Friday night, Tunda had been on the list of India's 20-most wanted terrorists. He is believed to have helped plan and execute 40 blasts in Delhi and other cities during the 90s. He grew up in and around Delhi and escaped to Pakistan in 1995.