The woman, now 21, is being questioned on suspicion of with-holding information in relation to the disappearance of Sandra Collins from Killala on December 4, 2000.
Although Ms Collins’ body has never been recovered gardaí believe the 29-year-old was murdered.
Detectives suspect the woman they arrested may have crucial information which could progress their investigation.
Gardaí have stressed the woman was only a child at the time and had no direct involvement in the disappearance.
“She has some information regarding what happened, that’s the suspicion,” said a garda source.
It is thought she may have connections with a man, who is the main suspect in the case.
In what is a major breakthrough, gardaí arrested the woman at 11am in the Ballina area. She was detained under Section 30 of the Offences Against the State Act at Ballina Garda Station and can be held for up to three days.
Ms Collins lived with her aunt on Courthouse Street in Killala when she disappeared on the evening of December 4.
She was last seen at a local takeaway at 11.15pm, where she bought some food.
Her fleece jacket and a chip bag were found on a nearby pier four days afterwards, but gardaí suspect this was staged to look like a suicide.
Gardaí made a fresh appeal for information last December. This led to a number of new witnesses coming forward, who spoke of a white van at the time of the disappearance.
Gardaí and Crimestoppers, made a further appeal two weeks ago and asked for help in identifying the van.
Superintendent Peter O’Boyle of Ballina Garda Station said yesterday: “We have made very good progress in the last three to four months. We have conducted a lot of media appeals. There has now been a arrest in relation to the case.”
The Collins family said their hope has been renewed by the unprecedented positive response from the public.
Bridie Conway, Sandra’s sister, said: “The CrimeCall and Crimestoppers appeal resulted in new calls to the gardaí and has stirred up emotions in the local community and the general public. As far as the family is concerned, we are not seeking justice. All we want is one phone call, one letter, to say this is where she is. Go and get her.
“If someone has done wrong, this is the one decent thing they can now do and there are so many ways they can do it. If they can show us compassion we are willing, as far as we can, to show them compassion.
“If they could just give Sandra back to us and finish this nightmare, we could then lay her to rest with our mother and brother and finally know that she is now safe.”