A PR executive arrested over phone hacking at the News of the World was paid £24,000 by Scotland Yard to work as a two-day-a-month consultant.
Neil Wallis, a former deputy editor at the Sunday tabloid, was employed as recently as last year as sick leave cover for the force's deputy director of public affairs, a police spokesman confirmed.
The 60-year-old's contract was cancelled less than six months before the launch of Operation Weeting - the second investigation into phone hacking at News International.
Wallis was arrested in a dawn raid at his west London home on suspicion of intercepting mobile phones.
He was questioned for several hours at Hammersmith police station before being bailed until a date in November, Scotland Yard confirmed.
Wallis, who served under Andy Coulson's editorship before becoming the paper's executive editor in 2007, is the ninth person arrested since the Metropolitan Police launched the fresh investigation.
Before he was released on bail tonight, Scotland Yard disclosed that his PR firm, Chamy Media, was employed in 2009 and last year to "provide strategic communication advice and support".
As part of the contract, Wallis advised the Commissioner's Office, the Directorate of Public Affairs and Specialist Operations, working closely with Assistant Commissioner John Yates.
A statement from the force said: "Three relevant companies were invited to provide costings for this service on the basis of two days per month.
"Chamy Media were appointed as they were significantly cheaper than the others. The contract ran from October 2009 until September 2010, when it was terminated by mutual consent."
Wallis, who lives in Chiswick, west London, joined Rupert Murdoch's UK newspaper group News International in 1986, rising to become deputy editor of the Sun.
He was editor of Sunday tabloid the People from 1998 until he joined the News of the World five years later.
After leaving newspapers, he started working for entertainment PR firm the Outside Organisation in 2009.
He is also a former member of the Editors' Code of Practice committee and of the Press Complaints Commission, the British newspaper industry's self-regulating body which has been accused by politicians of being too weak to tackle serious journalistic malpractice.
The arrest came as police chiefs were grilled over their associations with Wallis and other executives during the ill-fated first inquiry into hacking.
Commissioner Sir Paul Stephenson said his integrity was "completely intact" as he defended his decision to dine with Wallis in 2006.
Sir Paul told a Metropolitan Police Authority meeting: "I do not believe that on any occasion I have acted inappropriately. I am very satisfied with my own integrity."
Mr Coulson, 43, who was Downing Street communications chief until January this year, was himself arrested by Operation Weeting officers on Friday over alleged phone hacking and illegal payments to police. He was released on bail until October.