Melanie Hall went missing following a night out in Bath in June 1996. Her remains were discovered at the side of the M5 motorway last October.
Avon and Somerset Police said today a 38-year-old man is being held and will be interviewed in connection with her murder and the disposal of her body.
The man, from Bath, was arrested after turning himself in to the police station in Manvers Street, Bath.
Detective Superintendent Mike Courtiour, leading the murder inquiry, said today: "This is obviously a significant development after 14 years but I must stress that our investigation is still very much ongoing.
"Melanie's parents, Pat and Steve Hall, are always kept informed and are aware that we have made an arrest.
"This is part of the investigation that has been going on now for eight months since Melanie's body was discovered.
"In that time the investigation team has continued to work tirelessly, following up new information we have received and revisiting the previous investigations that followed Melanie's disappearance from Walcot Street in June 1996.
"An additional 250 statements have been taken and 1,200 new tasks and investigative actions have been completed. Today's arrest was one such action.
"I once again urge anyone with information to come forward and provide us with the information and evidence we need to identify Melanie's killer or killers and bring them to justice."
Miss Hall, 25, was last seen at Cadillacs nightclub, in Walcot Street, on June 9 1996.
Her remains were found last October near junction 14 of the M5 in South Gloucestershire by a workman clearing vegetation.
Miss Hall, a psychology graduate, had been on a night out with friends and her boyfriend of three weeks, Dr Philip Karlbaum, who left the club "upset" after seeing her dancing with another man.
Miss Hall, who worked as a clerical officer in the orthopaedic department at Bath's Royal United Hospital where she met Dr Karlbaum, was last seen sitting on a stool near the dancefloor shortly after 1am.
Thousands of nightclubbers and taxi drivers were interviewed in an investigation involving 60 officers and several searches of the River Avon, but no trace of Miss Hall was found.
That was until last October, when her remains were discovered hidden under five plastic bags. A ring which had been in her family for generations was also found.
In 2003 police arrested two men in connection with Miss Hall's disappearance but they were released without charge after police searched buildings and a field near Bath.
The police case has never been closed and detectives have looked at possible links with the case of estate agent Suzy Lamplugh and the so-called "Batman rapist" - a serial sex attacker in Bath who has evaded capture for years.
Shortly after Miss Hall's remains were discovered, a man turned himself in to a police station in Greater Manchester in connection with the murder, but he was eliminated from police inquiries after undergoing psychiatric tests.
Miss Hall's parents spoke of their "untold anguish" shortly after officers confirmed the human remains found by the motorway were those of their daughter.
Mr Hall, 65, an ex-chairman of Bath City, said he needed to know how his "vibrant" daughter became a "bag of bones".
Mr Hall, from Bradford-on-Avon, said the killer was probably watching and urged the public to help.
He said: "People out there know, they've lived with that secret for 13 years - now I'm appealing for the person who knows to come forward.
"Thirteen years ago we had a young vibrant daughter with a bright future in front of her. Today we have a bag of bones discarded here on the side of a motorway."
Mrs Hall added: "I feel very angry that she has been dumped on the side of the road like a sack of garbage. I'm sure I'll come to terms with that at some stage."
