Damian Green, the shadow immigration minister, was held in a London police cell in connection with a series of leaked stories about illegal immigrants and Home Office failures.
The police are overseen by the Home Office in England and Wales, and the operation came after a complaint from the government's Cabinet Office.
Mr Green was later released on bail and told to return for further questioning in February.
Sources said he was questioned on leaked Whitehall documents. The MP for Ashford, Kent, may face charges of aiding, abetting, counselling or procuring misconduct in public office.
His constituency office, London home and Commons office were searched in operations described as "Stalin-esque" by Mr Green's supporters.
Senior Tories last night claimed counter-terrorism police were involved in the raids.
David Cameron, the Tory leader, was said to be "very angry" about the operation, which came on the first day that parliament had broken up for a short recess. This prevented MPs asking questions about Mr Green's arrest.
Last night, Mr Cameron was standing behind his colleague, but Mr Green could be forced to resign if any embarrassing disclosures come to light.
The development also plunges Labour and the Tories into a full-scale dirty tricks battle, following suspicions about leaks from the Treasury regarding the Pre-Budget Report.
A Tory source said of the arrest: "This is unprecedented in its heavy-handedness."
Boris Johnson, the Tory Mayor of London, was told in advance of the Met's plan to arrest Mr Green, and expressed "trenchant" concerns, his office said last night.
A statement issued by Mr Johnson's office said: "The mayor finds it hard to believe that, when terrorists have gone on the rampage in India, anti-terror police in Britain have apparently targeted an elected representative of parliament for no greater crime than allegedly receiving leaked documents."
The arrest follows the detention of a suspected Home Office whistleblower ten days ago.
In a statement, the Conservative Party said: "Mr Green has legitimately revealed information which the Home Office chose not to make public. Disclosure of this information was manifestly in the public interest. Mr Green denies any wrongdoing."
George Osborne, the shadow Chancellor, said: "It has long been the case in our democracy that MPs have received information from civil servants. To hide information from the public is wrong. It's an extraordinary case. I think there are going to be some very, very big questions asked of the police."
The Metropolitan Police said: "The investigation into the alleged leak of confidential government material followed the receipt of a complaint from the Cabinet Office. The decision to make the arrest was taken solely by the Metropolitan Police Service without any ministerial knowledge or approval."
Downing Street said: "This is a matter for the police. The Prime Minister had no prior knowledge of the arrest and was only informed after the event."
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DAMIAN Green has repeatedly won plaudits from his own side for getting the government on the back foot on the flashpoint issues of modern politics.
He is regarded as one of the "attack dogs" of David Cameron's team, on several occasions embarrassing Home Secretary Jacqui Smith over events in her department.
Since being appointed to his current job in 2005, he has led the Tory charge over claims the Home Office has "lost control of Britain's borders" while steering clear of the strident anti-immigrant rhetoric which had often proven troublesome for the party in earlier periods.
In many ways, the 52-year-old is a highly unusual occupant of a Metropolitan Police cell.
Educated at Balliol College, Oxford, he was president of the Oxford Union and went on to work in 10 Downing Street as part of Prime Minister John Major's policy unit from 1992-94. He entered parliament as MP for Ashford in Kent in 1997, a seat he has held since.
Married to Alicia, with two daughters, Mr Green was educated at Reading School in Berkshire and secured a first-class honours degree in philosophy, politics and economics at Oxford, where he was a contemporary of his current boss, shadow home secretary Dominic Grieve.
THE stories at the centre of the arrest are believed to be sourced from leaked Whitehall documents and include:
Revelations that the Home Office hired illegal immigrants as cleaners in its own offices.
A memo from the Home Secretary's office warning that around 5,000 illegal immigrants were employed in sensitive security posts after a Home Office-sanctioned vetting department failed to check applicants properly.
A memo from the Home Secretary to the Prime Minister stating what the security consequences of the economic downturn would be.
A list of MPs opposed to now-failed Government plans to detain terror suspects without charge for up to 42 days.