"Despite repeated warnings by police not to proceed with his rally at the Istana, Chee Soon Juan disregarded the law, spoke to a small crowd and was arrested," the police said in a statement.
Political gatherings are rare in Singapore and event organisers must seek the go-ahead from the police beforehand.
Chee, a free-speech proponent and former university lecturer, is also chief of the Singapore Democratic Party (SDP).
In addition to Chee's arrest, police also took into custody SDP member Gandi Ambalam and Muslim activist Zulfikar Bin Mohamad Shariff.
Jailed twice in the past for making speeches without a permit, Chee is also battling a defamation suit brought by Prime Minister Goh Chok Tong and Senior Minister Lee Kuan Yew.
The police turned down Chee's application for a rally on the grounds that it could cause law and order problems outside the offices of President S.R. Nathan in Singapore's prime shopping belt.
Following the Chee's arrest and that of SDP party member Gandi Ambalam, the party said the two men were taken into custody before either had a chance to speak.
Police told the pair to leave, but "Chee refused and both Gandhi and him were forcefully ushered into a nearby police van by more than a dozen police officers," the SDP said.
They planned to speak on "People Against Poverty" (PAP) -- a pun on the acronym of the People's Action Party that has ruled Singapore since Independence in 1965.
Zulfikar, a former leader of the Malay Muslim group, Fateha, was charged with causing a disturbance and disrupting police work.
Zulfikar was one of the few to criticise the government for arresting 15 Muslims who allegedly had ties to the al Qaeda network. The United States blames al Qaeda for the September 11 attacks on New York and Washington.
The stately grounds of the president's offices, normally off limits to the public, draw hordes of Singaporeans and tourists when they are opened a few times each year, as they were on Wednesday.