Rangers' Faye and Harry Redknapp held in football corruption inquiry
It is understood that Amdy Faye, one of his former players, now with Rangers, and Willie McKay, Faye's Scottish-born agent, were also arrested.
Peter Storrie, Portsmouth's chief executive and the club's former chairman, was also among those held. It was also reported Milan Mandaric, 69, now at Leicester, was the other man arrested.
The moves follow searches of various clubs, including Rangers, this summer.
McKay was involved in Faye's transfer from Portsmouth to Newcastle in 2005 for 2 million.
The Senegalese midfielder, 30, switched to Charlton and is now on loan to Rangers.
The force said that the five were being held on suspicion of conspiracy to defraud and false accounting.
It said the men were taken into custody as officers swooped on eight undisclosed addresses across the UK.
The raids were part of an investigation by the force's economic crime unit into alleged bungs in the game.
A spokesman for Portsmouth FC said last night: "We can confirm that chief executive Peter Storrie and manager Harry Redknapp have today been asked to help police with their inquiries concerning a matter dating back to 2003.
"This was prior to the new owner taking control of the club at the beginning of 2006. The club is fully supportive of Peter and Harry, who are co-operating fully with City of London Police."
Last year, the Football Association brought in Lord Stevens, a former Metropolitan Police commissioner, and his company, Quest, to carry out a separate inquiry into dubious transfers.
A City of London Police spokeswoman said: "Five men have been arrested on suspicion of conspiracy to defraud and false accounting as part of an ongoing investigation into football corruption.
"One search is under way; seven additional searches at a variety of locations across the country have now been concluded."
A 61-year-old man was held in May on suspicion of money laundering and a 28-year-old - rumoured to be Tottenham Hotspur player Pascal Chimbonda - was questioned in September.
Police also searched Rangers, Newcastle United and Portsmouth as well as two homes during a series of raids in July.
Strathclyde Police said it had assisted the City of London force with the investigation and Rangers said they had co- operated fully. It was the first time a Scottish club had become embroiled in the investigations which have dogged the English Premier League.
Monaco-based Willie McKay is the agent of top level footballers including James McFadden, Joey Barton, Henri Camara, Scott Brown, Jean-Jol Perrier-Doumb, Tyrone Mears and Pascal Chimbonda.
He was one of the agents investigated by the Quest team, led by Lord Stevens, which looked into allegations of "bungs" and fraud in transfers.
Peter Storrie is chief executive of Portsmouth. FC He has also worked with West Ham United and Notts County.
As managing director of Southend United his reported 120,000 a season salary provoked outrage. And his move from Notts County to Portsmouth FC was also controversial, initially taking the role on a job share basis.
Harry Redknapp, 60, currently manager of Portsmouth, started his footballing career with West Ham United before moving to Bournemouth and Brentford. In 1992 he returned to West Ham as assistant manager and two years later became the Hammers' eighth manager in the club's history. In June 2001 he was appointed director of football at Portsmouth.
Serbian business tycoon Milan Mandaric, 69, has owned Portsmouth FC and Leicester City.
In 1998 he sold Nice and took over Portsmouth. He resigned as chairman of Portsmouth on 21 September 2006, indicating that he wanted a break from football. In February this year, Mandaric was unveiled as owner of Leicester City FC.
Senagalese Amdy Faye currently plays as a defensive midfielder for Rangers on loan from Charlton Athletic.
He started his career at French Ligue 1 club AS Monaco FC and played for Senegal at the 2002 FIFA World Cup, before transferring to Portsmouth for 1.5 million in August 2003.
Faye transferred to Newcastle in January 2005 and in August 2006 completed a move to Charlton Athletic