Mustafa Nazir Shaikh, a sand trader, was found killed near Welkar Petrol Pump on the Ghodbunder Road last night.
There were strangulation marks on his neck and stab injuries on some parts of the body, said a police officer.
Investigators learnt that Shaikh had been seen last with constable Mustak Mulani of Mumbai police on the afternoon of October 31.
Further probe revealed that Mulani had lent some money to Shaikh, and subsequently they had a spat as Shaikh didn't repay it.
Kashi Mira police today arrested constable Mulani who confessed to killing Shaikh, the officer added.
Police are looking for his friend who abetted the crime.