India is reviewing a list of 50 most wanted fugitives it says are hiding in Pakistan, a day after one of them was traced to a prison in Mumbai (Bombay).
Feroz Abdul Rashid Khan, who is accused of involvement in a 2003 train bombing, was arrested last year and is behind bars in the city's Arthur Road jail.
Earlier it turned out that another fugitive had already been bailed and was living in Mumbai with his mother.
Opposition parties and Pakistani media have derided the episode as a fiasco.
Correspondents say the mistakes are likely to cost India dear, as well as being hugely embarrassing. They say Islamabad will now be able to raise doubts about other names on the list too.
For years Pakistan has denied harbouring militants India says are guilty of attacks on its soil.
Lapses
The most wanted list was removed from the website of the Central Bureau of Investigation after news of the second mistake emerged.
We have an inmate called Feroze Khan in the Arthur Road jail, the Times of India newspaper quoted the inspector general of prisons, Surendra Kumar, as saying.
Mr Khan's lawyer Farzana Shah told the BBC that he had been arrested on 5 February last year and had been in jail since then.
In a statement, the CBI said a preliminary inquiry has revealed a lapse regarding inclusion of Feroz Abdul Rashid Khan in the list.
An inspector has been suspended, two officials transferred and an inquiry launched into the lapse, the statement said.
Doubts were raised on Wednesday when it emerged that Wazhul Kamar Khan, who is also accused of involvement in a 2003 Mumbai train bombing, had already been released on bail.
India gave the list to Pakistan at the end of March when the home secretaries of the two countries met for talks.
India blames Pakistan-based militant groups, such as the banned Lashkar-e-Taiba (LeT), for carrying out many of the attacks in India in recent years.
It also accuses Pakistan of providing sanctuary to former Mumbai underworld don Dawood Ibrahim. Mr Ibrahim and LeT founder Hafiz Saeed are among those named on the most-wanted list.
