The man was arrested following a complaint filed by the parents of the victim, who identified him, Deputy Commissioner of Police (East) N Satish Kumar said.
"The victim's mother had seen the watchman making her daughter sit on his lap, hugging her and offering chocolates," he said.
"We have arrested the watchman of the school for allegedly sexually assaulting a three-year-old," Kumar said.
He said the girl's parents came to know about the incident when she complained of pain in her private parts after returning from school yesterday afternoon.
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Asked about the alleged lathicharge against protesting parents, Kumar said in fact some protestors beat up police. "We did not resort to lathicharge against the protestors. On the contrary, one of our Sub Inspectors and another policeman were beaten up," he said.
The incident is a grim reminder of a series of sexual assaults on minor girls in upscale schools in the city last year, raising questions about safety of girls in schools.
The sexual assaults on minor girls have also evoked public outrage.