India is to investigate after a man whose name was given to Pakistan on a list of the 50 most wanted fugitives was found living near the Indian city of Mumbai (formerly Bombay).
Wazhul Kamar Khan is accused of involvement in a blast on a Mumbai train in 2003 in which 11 people were killed and more than 80 injured.
He is number 41 on the list of people that India says are hiding in Pakistan.
India blames Pakistan-based militant groups for attacks in recent years.
The home ministry has ordered an inquiry into the error. The opposition Bharatiya Janata Party has described it as a "monumental lapse".
Wazhul Kamar Khan was arrested last year, but later released on bail. He continued to live at his address of many years, in the Mumbai suburb of Thane, with his mother, wife and children.
Embarrassment for India
Correspondents say the mistake is likely to cost India dear.
They say Islamabad will now be able to raise doubts about the other names on the list too.
India blames Pakistan-based militant groups like the banned Lashkar-e-Taiba (LeT) of carrying out many of the attacks in the past years.
It also accuses Pakistan of providing a safe sanctuary to former Mumbai underworld don Dawood Ibrahim.
Mr Ibrahim and LeT founder Hafiz Saeed are among those named on the most-wanted list.
On Tuesday, Home Secretary GK Pillai said his ministry accepted the blame for the mistake.
"We will examine the records and put out a statement clarifying the situation by lunch-time tomorrow [Wednesday]," Press Trust of India quoted him as saying.
Home Minister P Chidambaram tried to play down the mistake.
"I don't think we should make a big issue of it. It is possible there could be an error, or there could be two people with the same name. I will check," he said.
"It is a monumental lapse... It appears that the home ministry has risen to the optimum level of its incompetence," senior BJP leader Arun Jaitley said.
"The home minister has embarrassed the country... It is an unpardonable mistake," added another BJP leader Sushma Swaraj.