On 21 September 2004, Yusuf was on a United Airlines flight from London to Washington, travelling to a meeting with U.S. entertainer Dolly Parton, who had recorded "Peace Train" several years earlier and was planning to include another Cat Stevens song on an upcoming album. While the plane was in flight, his name was flagged as being on the No Fly List. Customs and Border Protection (CBP) officers alerted the United States Transportation Security Administration, which then diverted his flight to Bangor, Maine, where he was detained by officers from the Department of Homeland Security.

The following day, Yusuf was denied entry and flown back to the United Kingdom. A spokesman for Homeland Security claimed there were "concerns of ties he may have to potential terrorist-related activities". The Israeli government had deported Yusuf in 2000 over allegations that he provided funding to the Palestinian organisation Hamas, but he denied doing so knowingly.[74] Yusuf, who repeatedly has condemned terrorism and Islamic extremism, stated "I have never knowingly supported or given money to Hamas".[75] "At the time I was reported to have done it, I didn't know such a group existed. Some people give a political interpretation to charity. We were horrified at how people were suffering in the Holy Land."

However, the United States Department of Homeland Security (DHS) added him to a "watch list". The removal provoked an international controversy and led British Foreign Secretary Jack Straw to complain personally to United States Secretary of State Colin Powell at the United Nations. Powell responded by stating that the watchlist was under review, adding, "I think we have that obligation to review these matters to see if we are right".