Why does Gabriel tell Leber that the hunting club is near the university? Also why does Leber believe him when just a minute before, Gabriel had said that the club patronizes just blocks from where Grossberg was killed?

Gabriel asked Leber to lay low and to not infiltrate the club as he was already on 'the inside' there. When Leber made it clear that he wouldn't agree to this Knight gave him a fake address. As for Knight's terminology, 'blocks' is a very vague term. It could mean 2 or 10. And judging by the tram map, the university is right beside the Marienplatz where the murder took place.

I'm confused as to what Gabriel thought would happen if the police investigated the hunt club. Did he think the police were going to arrest him? Even if they interrogated everybody at the club including Gabriel, I don't see what Gabriel would have had to hide.

Gabriel might have been afraid that the police might get hurt. He was investigating an alleged werewolf at best and possibly an entire pack at worst, and he probably knew that that was out of the league of ordinary police; and it's not like he could just tell them that.

Gabriel tries to keep the police away from the club because he's still working his own investigation. If police turn up at the club, it's obvious to all the members that Gabriel must be responsible (they're already suspicious about why he should be allowed to have access when the membership is supposedly very exclusive) At that point, whoever is really responsible for the crimes will cover up the evidence and escape detection. And, most likely, then go after Gabriel himself.

Ultimately, Gabriel doesn't think that the police can help with the investigation since they don't believe a real werewolf is involved. He knows he'll ultimately need them to deal with the perpetrator but he wants to know exactly who that is, and find some evidence which the police will believe, before having them descend upon the club. (We know from Gabriel Knight 1 that Gabriel isn't comfortable with this aspect of the Schattenjager duty, and so he's hoping the police will handle the messier side of things!)