Maninder Pal Singh Kohli was arrested in Kalimpong, near the border with Nepal, days after Hannah’s parents, Trevor and Hilary Foster, arrived in the country to help with the search.
Darjeeling police chief Rajiv Mishra said locals in Kalimpong had recognised Kohli from a photograph in a newspaper report appealing for help.
“The accused has admitted to being at the place of the crime and to throwing the body away from the boot of his car,” said Mr Mishra.
“But he has not admitted to the crime and he has not explained how the body got into the car.”
He added: “Kohli might also have seen the report and was apparently trying to flee to Nepal.”
Mr Mishra said Kohli had been living under the name Dennis and had married a Nepali woman.
The Fosters, from Southampton, are currently in India with officers from Hampshire Police to make public appeals for information about the whereabouts of Kohli, who fled England two days after 17-year-old Hannah’s body was found in March last year.
Mrs Foster said: “We are delighted with the news of this arrest. During the last five days we have been up and down on an emotional roller coaster.
“We are just keeping our fingers crossed that the man arrested is the right man.”
Detective Superintendent Alan Betts, who is with the Fosters in India, said that he had been contacted by the director general of police in west Bengal notifying him of the arrest but said it would take at least a couple of days to confirm the man’s identity.
A Hampshire Police spokeswoman said that if it was confirmed as Kohli, extradition procedures would be started.
Hannah’s body was discovered by the side of a country lane near Southampton on March 16, two days after she disappeared just half a mile from her home in the Portswood district of the city.