Footage of the burning shows Sion Owens, 40, from south Wales and a candidate for the forthcoming Welsh Assembly elections, soaking the Qur'an in kerosene and setting fire to it.
A video clip of the act, leaked to the Observer and passed immediately to South Wales police, provoked fierce criticism from the government.
A statement from the Home Office said: "The government absolutely condemns the burning of the Qur'an. It is fundamentally offensive to the values of our pluralist and tolerant society.
"We equally condemn any attempts to create divisions between communities and are committed to ensuring that everyone has the freedom to live their lives free from fear of targeted hostility or harassment on the grounds of a particular characteristic, such as religion."
Owens, who has previously stood for a council seat, was last Tuesday unveiled by the BNP as a candidate for next month's assembly elections. Several photographs place him alongside party leader Nick Griffin, including one showing the pair embracing during a party conference.
The footage comes at a time of heightened tensions. Internationally, protests continued in Afghanistan last week against the recent Qur'an burning by the US pastor Terry Jones in his Florida church.
Jones's act triggered a wave of global violence that nine days ago led to protesters storming a UN Afghan compound, killing three UN staff members and four Nepalese guards. Police had feared that far-right British extremists might attempt to stir tensions here by replicating Jones's stunt.
Superintendent Phil Davies of South Wales police, who led the investigation, said: "We always adopt an extremely robust approach to allegations of this sort and find this sort of intolerance unacceptable in our society."
Owens was arrested within hours of police receiving the video. A second person, believed to have filmed the Qur'an burning, is also in police custody.
It is unclear when the incident took place, but the five-minute footage is already understood to have been circulated to extremists. There is no evidence that Griffin was aware of the film.
When Jones went ahead with his "punishment" of the Qur'an on 20 March it was initially largely ignored until it was streamed on the internet and preserved on YouTube.
The footage of the burning in Britain clearly identifies Owens, who is wearing a "Whitelaw No Surrender" T-shirt. The film starts with the Qur'an lying in a Quality Street tin before Owens begins dousing the holy book in flammable liquid and then setting fire to it. The camera zooms in as the Qur'an burns.
Saqed Mueen of the international security thinktank, the Royal United Services Institute, described the act as proof of the "globalisation of outrageous stunts". Concern over Islamophobic provocation among far-right elements is epitomised by the rise of the English Defence League, which was founded in 2009 and claims to have thousands of members in scores of regional branches.
The EDL's rise coincides with the decline of the BNP as a political force, evident during last year's poor general election performance. Although Griffin's party had 338 candidates in the parliamentary elections, a record number for a far-right party in Britain, its share of the vote in key seats fell.
The BNP fared little better in the council elections, failing in its concerted attempt to win control of Barking and Dagenham council and losing all but two of its 28 wards.
The news that a senior BNP figure has been arrested after a film showing him burning the Qur'an will only discredit the party further, according to anti-fascist campaigners.
Photographs show Owens at a Welsh Defence League demonstration with a group of alleged Nazis including Wayne Baldwin, who has been pictured posing in front of a swastika flag. The Observer has also been passed images that show Owens's face apparently superimposed on Hitler's body.
Owens was officially announced last week as the BNP's number three candidate for the South Wales West constituency of the Welsh assembly.
In 2008 he stood for the BNP in council elections, polling almost a fifth of votes in his ward but finishing last out of three candidates. His campaign posters at the time show him standing on a ticket against "mass immigration, enforced multiculturalism, political correctness".
Although the BNP announced a record number of candidates for the Welsh assembly elections last week, anti-fascist groups maintain the party is a fading force, claiming that it has struggled to field candidates in the forthcoming local elections in areas that used to be target seats.
The Guardian
