London's Metropolitan Police force said "officers have arrested a 72-year-old man on suspicion of misconduct in public office" at an address in north London.
It did not name Mandelson, in keeping with British police practice, but the suspect in the case has previously been identified as Mandelson.
Police are investigating Mandelson over documents suggesting he passed sensitive government information to Epstein a decade and a half ago.
He does not face any allegations of sexual misconduct.
His arrest comes four days after Andrew Mountbatten-Windsor, the former Prince Andrew, was arrested on suspicion of a similar offence related to his friendship with Epstein.
Mandelson was fired from his diplomatic post in September after emails were published showing that he maintained a friendship with Epstein after the financier's 2008 conviction for sex offences involving a minor.
When more details emerged in documents released by the US Justice Department last month, police opened a criminal probe.
The Epstein files suggest that Mandelson passed on sensitive — and potentially market-moving — government information to Epstein in 2009, when Mandelson was a member of the then-government.
Officers subsequently searched Mandelson's two houses in London and western England.
The decision to appoint Mandelson nearly cost UK Prime Minister Keir Starmer his job as questions swirled around his judgement in someone who has flirted with controversy during a decades-long political career.
Though he has acknowledged he made a mistake and apologised to victims of Epstein, Starmer's position remains precarious.
His future may rest on the release of files connected to Mandelson's appointment.
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