Goodman, who was jailed for four months in 2007 on phone hacking charges, was arrested for allegedly paying police for information, police sources have said.
He was originally jailed after royal staff members complained about voicemail messages having been intercepted relating to a knee injury sustained by Prince William.
His arrest follows that of the paper’s former editor Andy Coulson this morning. Coulson is being questioned in connection with both allegations of phone hacking and illegal payments to police.
Both the arrests are part of a police operation looking at alleged payments to police by journalists at the News of the World, part of Rupert Murdoch's News Corp.
The investigation has led to Murdoch closing the paper after this Sunday's edition.