The source, described by The Mirror as being close to Madeline's parents, Gerry and Kate McCann, said the individual was picked up after the newspaper reported he had told people he had seen the missing girl alive this summer on an unspecified island in the Mediterranean.
"This is high up on the credibility scale," the source said.
The person who reported the encounter was described as an attorney who had met the suspect at a party in suburban Manchester in August. The suspect allegedly told the lawyer, whose name was not released, he had been introduced to Madeleine, although it was not clear if she was in the company of an adult.
The arrest could be a major breakthrough in the hunt for the girl, who disappeared from a resort in Portugal where she was vacationing with her parents in 2007. She was only 3 years old at the time.
Authorities have fielded scores of tips and reported sightings in the years since; however the report from the Manchester attorney was seen as more credible than most.
"The fact that he was prepared to risk his reputation by making the statement does suggest that it is credible," the family source said.
The arrest came as the BBC was set to air an episode of the television series "Crimewatch," which is based on a detailed reconstruction of the disappearance and a live appeal by the McCanns for their daughter's return.
Scotland Yard said the program, which airs Monday, was based on a new timeline that has evolved since 2007 and included details about the movements of several people who were at the Portuguese resort at the time.