The suspect, who police said was named "Abid" and is believed to be in his early 20s, shot Iqbal at close range with a 30-bore pistol, hitting him in his right arm as he was preparing to leave a public meeting in Punjab province, senior police official Raja Riffat Mukhtar said.
"The attacker was about to fire a second shot when police and people in the meeting overpowered him," said Malik Ahmed Khan, a spokesman for the Punjab government, adding that Iqbal was undergoing surgery and confirming his life was not in danger.
Iqbal "was targeted", his aide Asim Khan told AFP, confirming that the attacker has been arrested. Punjab health secretary Najam Shah said he had been taken to a hospital in Lahore.
Video footage of his arrival released by the ruling Pakistan Muslim League-Nawaz (PML-N) showed him being lifted from a helicopter on a stretcher, his eyes open as he responded to questions.
"He's stable... he's ok," a hospital official, who asked not to be named, told AFP.
The shooting in Iqbal's constituency of Narowal district drew swift international condemnation, and comes as Pakistan gears up for its second ever democratic transition, with federal polls widely expected this summer.
It follows a series of blows to the PML-N, which has been struggling to find its footing since its eponymous leader Nawaz Sharif was ousted by the Supreme Court over graft allegations last summer.
Prime Minister Shahid Khaqan Abbasi, along with opposition leaders Imran Khan and Bilawal Bhutto and the powerful army chief General Qamar Javed Bajwa, have all condemned the attack.
PML-N lawmaker Maiza Hameed told Pakistan's Geo News that the shooting was an attempt to "weaken democracy" ahead of the upcoming elections.
"Strongly condemn the assassination attempt on my friend Ahsan Iqbal... Just spoke to him & he is in high spirits," tweeted Punjab chief minister Shahbaz Sharif, brother to Nawaz.
"Those who indulged in this heinous act will be brought to justice," he continued. "PMLN will not be browbeaten into submission... Prayers for quick recovery!!"
Upcoming elections
The attack also caused widespread shock on Pakistani social media. "Ominous development as the country moves to the election season," tweeted analyst and editor of the Daily Times newspaper Raza Ahmad Rumi.
It was quickly condemned by the international community, with the French embassy, US ambassador David Hale, British High Commissioner Thomas Drew and UN coordinator Neil Buhne among those tweeting their support for his recovery.
Iqbal, who was touted as a potential prime minister when Sharif was ousted last July, is a US-educated lawmaker from a political family long associated with the PML-N.
Considered the brains behind the party's development agenda, he previously headed up the planning ministry.
The general election, due this year, has not yet been called, but is widely expected to be held in late summer.
The poll will pit the PML-N against the Pakistan Tehreek-e-Insaf party (PTI) led by former cricket star Imran Khan.
However the ruling party has suffered a series of blows, with Nawaz Sharif banned from politics for life, while foreign minister Khawaja Asif was removed by the Islamabad High Court late last month for violating election laws.
Sharif and his supporters have repeatedly denied allegations of corruption, suggesting they are victims of a conspiracy driven by Pakistan's powerful military to reduce the power of their party.
Despite the setbacks facing the PML-N, the party has won a string of recent by-elections, proving it will likely remain a force in the vote.
