Officials from the Malaysian Anti-Corruption Commission (MACC) confirmed the arrest was made today at the former prime minister's house on Jalan Langgak Duta in Kuala Lumpur today.
Since a shock election loss to his mentor-turned-foe Mahathir Mohamad in May, Najib has been barred from leaving the country and had millions of dollars of items seized from properties linked to him as part of the probe into 1Malaysia Development Berhad (1MDB).
1MDB is being investigated in at least six countries for alleged money laundering and graft.
However, Red Granite in March this year agreed to pay US$60 million (RM234 million) to the United States government to resolve allegations that it profited from corrupt money involving 1MDB, according to a report.
Civil lawsuits filed by the U.S. Department of Justice allege that almost $4.5 billion was misappropriated from 1MDB.
Bernama cites the Malaysian Anti-Corruption Commission (MACC) which has been investigating billions of state funds that went missing while Najib was in power.
Najib has denied allegations that he misappropriated funds ever since the 1MDB scandal emerged in 2015.
The anti-corruption agency earlier Tuesday questioned Riza Aziz, Najib's stepson and a Hollywood film producer, as it stepped up its probe of 1MDB.
Najib's arrest comes almost two months after his coalition's stunning rejection by voters in a May 9 general election.
Riza was solemn as he arrived at the anti-graft office Tuesday and didn't speak to reporters.
Billions of dollars are unaccounted for from the fund, set up by Mr Najib.
Red Granite agreed in March to pay the USA government $US60 million to settle claims it benefited from the 1MDB scandal.
Riza, who is Rosmah Mansor's son from her first marriage was in the centre of controversy when he was implicated by the US Department of Justice for allegedly siphoning hundreds of millions of ringgit to fund the steamy Hollywood movie The Wolf of Wall Street and two other films.
The accounts of several companies were also frozen as part of the investigation, the taskforce said.