Former Downing Street communications chief Andy Coulson was arrested today on suspicion of phone hacking and corruption.
Former News of the World royal editor Clive Goodman, who was jailed in 2007 for phone hacking, was also re-arrested today over allegations of corruption, sources said.
Mr Coulson was held at a south London police station this morning, sources said.
The 43-year-old ex-editor of the News of the World's arrest piles further pressure on the Prime Minister, who gave him a job at No 10 despite his association with the scandal.
The widely-anticipated arrest is the latest bombshell in a catastrophic week for News International chiefs, who announced they were shutting the Sunday tabloid because it had betrayed its readers' trust.
A Scotland Yard statement said: "The MPS (Metropolitan Police Service) has this morning arrested a member of the public in connection with allegations of corruption and phone hacking.
"The man, aged 43, was arrested by appointment at a south London police station. He is currently in custody."
He was held at 10.30am by detectives investigating Operation Elveden - the inquiry into payments to police by the News of the World - and Operation Weeting, the long-running hacking investigation.
After arriving by appointment at the station, he was held on suspicion of "conspiring to intercept communications" and "corruption allegations contrary to Section 1 of the Prevention of Corruption Act 1906".
Shockwaves from the hacking revelations and police payment allegations prompted David Cameron to promise today he would "get to the bottom" of the scandal.
As Mr Coulson was being held by detectives, Mr Cameron revealed how the pair had grown close and built up a friendship.
The Prime Minister said they discussed the hacking allegations while he was employed but he never had reason to doubt "the assurances he had given me and I accepted".
Of their contact since Mr Coulson's January resignation, he added: "I have spoken to him, I have seen him, not recently and not frequently, but when you work with someone for four years as I did, and you work closely, you do build a friendship and I became friends with him. He became a friend and is a friend."
Mr Coulson's detached home in Forest Hill, south London, was deserted all morning with no sign of relatives or car in the driveway.
He has been dogged by allegations of phone hacking on his watch for years, forcing him to give up his positions as the News of the World editor and then as the Conservatives' top spin doctor.
Mr Cameron said he took responsibility for Mr Coulson's hiring by the Government but insisted he had commissioned a firm to carry out a background check beforehand.
He said: "I took a conscious choice to give someone who had screwed up a second chance. He worked for me, he worked for me well, but actually he decided in the end the second chance wouldn't work, he had to resign all over again for the first offence."
Mr Coulson resigned from the No 10 post in January, saying the drip-drip of claims about illegal eavesdropping under his editorship was making his job impossible.
The Prime Minister said: "I made the decision, there had been a police investigation, someone had been sent to prison, this editor had resigned, he said he didn't know what was happening on his watch but he resigned when he found out, and I thought it was right to give that individual a second chance."
Mr Cameron said he and Mr Coulson spoke before Christmas about him leaving Downing Street.
"It wasn't in the light of any specific thing, it was a sense that the second chance wasn't working," he said.
Mr Cameron outlined sweeping changes to the way newspapers are regulated in the wake of the agenda-setting tabloid being sacrificed by James Murdoch, chairman of News International.
The decision was announced after advertisers deserted in droves over claims that murdered schoolgirl Milly Dowler, bereaved military families and relatives of 7/7 bombing victims were targeted by hackers working for the tabloid.
Amid widespread public anger, police chiefs revealed that 4,000 people might have fallen victim and evidence indicated journalists had paid officers.