Coulson's arrest came as Prime Minister David Cameron announced two investigations -- one on the phone hacking allegations and the other involving newspaper ethics, the BBC reported.
Coulson, who resigned as Cameron's communications director earlier this year, has denied knowing about the phone hacking while he was editor of the Sunday tabloid.
Investigators are also trying to determine if an executive with News International deleted most of an internal e-mail archive, The Guardian reported. Millions of e-mails were allegedly removed.
News of the World's Scottish editor, Bob Bird, and a lawyer for the paper also lied late last year about the e-mail archive, The Guardian said. Bird testified at a trial in Glasgow that e-mails disappeared en route to a server in Mumbai while Julian Pike, a solicitor for News International, submitted a document to the high court saying e-mails disappeared from the system within six months.
At his news conference, Cameron defended his decision to hire Coulson, saying it gave the former editor a "second chance."
News International said Sunday's edition of News of the World would be its last following the recent accusations that it hacked into phones of crime victims, celebrities, politicians and families of military personnel who died in Afghanistan and Iraq and of victims of the 2005 London Transport bombings. Police have identified 4,000 possible targets.
Cameron said one inquiry, led by a judge, would look into "why did the first police investigation fail so abysmally; what exactly was going on at the News of the World and what was going on at other newspapers?"
In January 2007 the News of the World's royal editor and a private investigator were jailed for plotting to intercept voicemail messages left for royal aides.
The second inquiry would examine the ethics and culture of the press, Cameron said.
Labor Party leader Ed Miliband called on Cameron to apologize for an "appalling error of judgment" in hiring Coulson, who was News of the World editor from 2003 to 2007.
Cameron said he alone decided to hire Coulson, the BBC said.
"I decided to give him a second chance but the second chance didn't work," the prime minister said.
Coulson, 43, turned himself in at a London police station and was in custody, police said.
He and a half-dozen other people at the tabloid, including high-ranking editors, are also suspected of illegally paying at least $160,000 to police for information and confidential documents, The Guardian and other newspapers said.
The growing list of allegations prompted News Corp. Thursday to close the 168-year-old News of the World, putting as many as 250 people out of work.
Deputy Chief Operating Officer James Murdoch, chairman Rupert Murdoch's son and heir-apparent, said the paper would close because the allegations, if true, were "inhuman" and had no place in the company.
The younger Murdoch said News Corp.'s British subsidiary had "failed to get to the bottom of repeated wrongdoings that occurred without conscience or legitimate purpose."
The closure -- which Murdoch's co-owned Times of London reported under the headline "Hacked to death" -- actually fits into a Murdoch plan because company executives had already intended to shut down the newspaper and make its six-day-a-week sister, The Sun, a seven-day paper, the BBC reported.