The man has been named in media reports as 72-year-old Freddie Scappaticci and the Belfast Telegraph said his arrest would make his former paramilitary comrades and British intelligence agents "distinctly uneasy".
Scappaticci has vehemently denied being Stakeknife.
Officers leading the probe into the activities of Stakeknife during the conflict in Northern Ireland told AFP on Wednesday that the man's arrest was their first in the investigation.
The investigation will look at "murders, attempted murders or unlawful imprisonments attributed to the Provisional IRA" and examine any evidence of crimes being carried out by British security agents.
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Police said the man was being held in an undisclosed location and declined to say where he was arrested.
Stakeknife headed up an internal security unit within the IRA that brutally interrogated and murdered suspected spies, according to media reports.
Scappaticci has admitted being a member of the IRA until 1990 but denied working for British agents.
"He knows (the IRA) leadership's darkest secrets. If he is charged, a lot of people on both sides of the Irish Sea will be very nervous," Belfast Telegraph political editor Suzanne Breen wrote.