Police found the remains of Layla Jeffery in Donald, a small town in rural western Victoria, late on Thursday afternoon after she went missing on the weekend.
A large-scale search was conducted in bushland west of Byrne Street after the teen was reported missing on July 5.
The high school student was last seen on McCracken Street in Donald the previous day, but had not been heard from since.
Local police, along with specialist officers from the dog squad, air wing and search and rescue squad were involved in the search.
Detective Inspector Dave Dunstan of the Missing Persons Squad said officers searched a home in Donald shortly after 11am on Friday.
"At this location, we've arrested a 16-year-old youth," he told reporters in Donald on Friday afternoon.Â
"We also have a 53-year-old Donald woman and a 55-year-old woman from Melbourne assisting us with our inquiries."
Det Insp Dunstan said the teenage boy was known to both Layla and the police.
"We are quietly confident that those responsible are in custody now," he added.
Police said they do not believe Layla's family was involved, confirming the search would continue late into Friday afternoon.
Detectives have launched an investigation into the girl's death, with police treating it as suspicious.
Residents in the small town of about 1500 people have come together following the devastating news.
Donald resident Peta Edmunds said the community was in grief.
"Our hearts are broken, and our entire community is grieving the heartbreaking loss of beautiful Layla," she posted to Facebook.
"No family should ever have to endure the unimaginable loss of a child ... As a community, we can't take away their pain, but we can come together to wrap our arms around them and remind them that they are not facing this alone."
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