Peter Mandelson has been arrested on suspicion of misconduct in public office.
Police officers arrested him at his home in Camden, north London, on Monday afternoon before taking him in an unmarked car to a police station to interview him.
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The former Labour minister has been accused of passing sensitive information to paedophile financier Jeffrey Epstein during his time as business secretary from 2008 to 2010 when Gordon Brown was prime minister.
Lord Mandelson has previously denied any wrongdoing.
A Metropolitan Police spokesperson said: “Officers have arrested a 72-year-old man on suspicion of misconduct in public office.
“He was arrested at an address in Camden on Monday, 23 February and has been taken to a London police station for interview.
“This follows search warrants at two addresses in the Wiltshire and Camden areas.”
Lord Mandelson’s arrest comes four days after the King’s brother, Andrew Mountbatten-Windsor, was also arrested on suspicion of misconduct in public office over his links to Epstein. He was released the same day and remains under investigation.
Two plain-clothed police officers were seen entering Lord Mandelson’s north London home at 4.16pm on Monday, before the Labour peer exited with two officers wearing bodycams half an hour later.
They then guided him into an unmarked Ford Focus car and drove away.
The Camden property had already been searched on 6 February, as had his home in Wiltshire.
Lord Mandelson was sacked as the UK ambassador to the US over his links to Epstein.
He resigned from the House of Lords following the US Department of Justice’s latest publication of the Epstein files last month.
In a statement at the time, Lord Mandelson said: “I have been further linked this weekend to the understandable furore surrounding Jeffrey Epstein and I feel regretful and sorry about this.
“Allegations which I believe to be false that he made financial payments to me 20 years ago, and of which I have no record or recollection, need investigating by me.”
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Lord Mandelson’s arrest came moments after MPs were told a first tranche of documents related to Lord Mandelson’s appointment as US ambassador is expected “very shortly, in early March”.
However, Chief Secretary to the Prime Minister Darren Jones said some of the correspondence between Downing Street and the peer will be delayed “because of the Metropolitan Police interest”.
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Sir Keir Starmer has said Lord Mandelson had lied during the vetting process about his connections to Epstein before taking the ambassador role and that related documents would show this.
Minister Jacqui Smith, who was in Gordon Brown’s cabinet alongside Lord Mandelson, defended Sir Keir, telling Sky News: “As soon as Keir Starmer understood what the reality of Peter Mandelson’s relationship with Jeffrey Epstein was, he sacked him, in the middle of the night.”
But Conservative leader Kemi Badenoch said Lord Mandelson’s arrest is “the defining moment of Keir Starmer’s premiership”.
“It’s a matter of when [Starmer] goes, not if he goes,” she said.
“I asked him if he had full confidence in Peter Mandelson, just a few months ago, and he said yes, despite all of these allegations being known, only to see the man arrested shows that the prime minister has terrible judgement.
“He’s weak. He has not released the information around the [Mandelson] files, though he sacks the person who is supposed to be overseeing the release.
“I think that shows what kind of person the prime minister is.”
Gordon Brown, who was prime minister when Lord Mandelson was business secretary, declined to comment on his arrest.
