The event was due to start at 6pm (1500 GMT) but Moscow police said Navalny was detained "over multiple calls to participate in an unauthorized public event."
The 41-year-old stands accused of repeatedly violating a law on organizing public meetings -- punishable by up to 30 days in jail.
Navalny insisted he did not receive any official explanation.
"I am sitting in a reception room and looking at a portrait of Putin," he said on Twitter.
One of his lawyers, Olga Mikhailova, later told AFP Navalny had been kept all day at the police station without a written statement outlining any reasons for detention.
Navalny, an anti-corruption crusader, linked his detention with another -- bigger -- rally scheduled in Saint Petersburg, Russia's second city and Putin's hometown, on October 7, the president's birthday.
And the head of Navalny's campaign, Leonid Volkov, was detained in Nizhny Novgorod, saying on Twitter he would be held overnight before a court hearing Saturday.
Navalny has said he wants to stand for president next March, but the authorities have said he is not eligible because he is serving a suspended sentence for fraud.
Putin, who has led Russia since 1999, is widely expected to seek and win another six-year Kremlin term.
After Navalny declared his bid he was hit by a new wave of legal obstacles and attacks and even had to travel to Spain for surgery after one assault left him almost blind in one eye.
Navalny has been briefly imprisoned before. He was detained prior to arriving at his last two rallies in Moscow on March 26 and June 12, both of which were not authorized.
He served sentences of 15 days and 25 days for organizing unauthorized protests.
'Senility and degradation'
Nizhny Novgorod authorities said they had refused Navalny permission to hold the rally.
"The Kremlin sees my meetings with the electorate as a huge threat and even an insult -- after all no one goes to their rallies without being paid," Navalny said.
Human rights commissioner at the Council of Europe Nils Muiznieks on Friday urged Russia to revise its laws on public events, saying it violated the country's international obligations and its own Constitution.
"The Russian legislation on freedom of assembly has been made considerably more restrictive in recent years," Muiznieks said.
Last week the Council of Europe's decision-making body, the Committee of Ministers, urged Russia to allow Navalny to stand for election despite his "arbitrary and unfair" conviction for fraud.
The Russian justice ministry has accused the Council of Europe of putting political pressure on Moscow ahead of the elections.
Navalny called on his supporters to show up at the rally in Nizhny Novgorod regardless.
"Come for the sake of principle and as a sign of protest against the stupidity, senility and degradation that have overtaken our country," he wrote.
Some 200 to 300 people turned up, said an AFP photographer at the scene.
Undeterred by the seemingly predetermined outcome, Navalny has pressed ahead with his presidential bid.
He has travelled and gathered crowds of supporters across Russia, seeking to shift public attitudes and battle political ennui in places such as the Pacific port of Vladivostok and other cities.
Political observers say that the growing atmosphere of intolerance toward dissent has prompted a surge in radical feeling in Russia as verbal threats from Kremlin supporters give way to physical attacks.
Many have applauded Navalny - whose ally Boris Nemtsov was assassinated in 2015 - for keeping up the fight when many have chosen to leave the country or stay quiet.
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