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Mr Green, who is the shadow immigration minister, was arrested at his home in Kent by counter-terrorism police officers.
The arrest follows a series of leaks to the Conservatives about Government policy, including a sensitive memorandum from the Home Office's most senior official on crime figures earlier this month.
David Cameron, the Conservative leader, is said to be "extremely angry" about the arrest and has privately accused the Government of "Stalinesque" behaviour.
Mr Green is understood to have been arrested at lunchtime today and is still in custody. He has not been charged.
Green has been arrested after obtaining leaked Whitehall documents. Police searched his family home and his office in the House of Commons.
He was arrested for "aiding and abetting misconduct in public office".
It is claimed that nine counter-terrorism officers were involved in the arrest.
Mr Cameron has pledged his full support for the shadow immigration minister. In a statement he said: "Disclosure of this information was manifestly in the public interest. Mr Green denies any wrongdoing and stands by his action."
However, the arrest of such a senior Conservative figure who hopes to become a Home Office minister will embarrass the opposition. He is now likely to face pressure to resign from the Tory front bench.
Government sources also believe that sensitive information from the Treasury, including confidential announcements in the pre-Budget report, was leaked to the Conservatives.
In February this year, Mr Green criticised the Government over leaked documents at the Home Office.
He said: "Ministers like to talk tough about cracking down on employers but it is clear that the system is failing in our most sensitive buildings. What makes this even worse is that ministers' first instinct was to cover it up."
An alleged "whistleblower", thought to be a male Home Office official was arrested 10 days ago.
It is understood that the inquiry is focusing on four Home Office documents allegedly obtained by the Conservatives. Last November, documents from the private office of Jacqui Smith, the Home Secretary, were leaked to the opposition.
They showed that ministers had known for four months that thousands of illegal immigrants had been cleared to work as security guards but had not told Parliament.
Other documents included information about an illegal immigrant working at House of Commons and a list of Labour MPs preparing to vote against the Government's anti-terrorism measures.
Tory sources angrily pointed out that the police move came after Parliament rose for a five-day holiday.
Had the Commons been sitting, they said, MPs could have immediately raised the matter with the Speaker.
The police search of Mr Green's office had to be authorised by the Serjeant at Arms, who answers to the Speaker.
Mr Green’s constituency office was also searched.
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