Surrey Police said they arrested a man from the Greater London area who is currently being held at a police station in the county.
Officers are also searching an address in Greater London in connection with the arrest.
Milly, 13, went missing on her way home from school in Walton-on-Thames on March 21, 2002.
Her body was eventually found in woods at Yately Heath, Hampshire, six months later.
A police spokesman said this morning: "Surrey Police have arrested a 57-year-old man from the Greater London area on suspicion of the abduction and murder of Milly Dowler.
"He is currently at a Surrey police station being questioned and an address in Greater London is being searched by officers from Surrey Police."
It is understood officers want to question the man, who has not been named, under caution in order to determine his whereabouts at the time when Milly was abducted.
Police said the 57-year-old man had been arrested at 8am today.
Although the investigation is now in its fourth year, officers have continued to follow up possible lines of inquiry.
In March this year, detectives released CCTV footage, specially enhanced by the FBI, of a red N-registration Daewoo Nexia car seen just metres away from where Milly was last spotted.
In July, Surrey Police questioned a 37-year-old man, from Drayton, Middlesex, over Milly's abduction but released him on bail. He is currently due to return to a Surrey police station in December.
Detectives have also made checks on a line-up of high-profile prisoners including Soham murderer Ian Huntley and M25 rapist Antoni Imiela because of possible parallels with their crimes, but found nothing linking them to the killing.
Earlier this year, police working on the case became interested in the movements of Lance Corporal David Atkinson, 31, who set himself on fire and jumped to his death from a Glasgow hotel window while under investigation over the murder of Cambridgeshire student Sally Geeson who was last seen on New Year's Eve 2004.
It came to light in January that Atkinson had links with the area where Milly's body was found, having spent time at Gibraltar Barracks in nearby Minley, Hampshire, in 2001, but officers now believe he was at a course in Kent at the time of Milly's disappearance.
Last year, detectives also expressed interest in serial sex attacker Andrezej Kunowski, a Polish immigrant convicted at the Old Bailey of the murder of 12-year-old Katerina Koneva who was strangled to death in London in May 1997.
Surrey Police recently confirmed that while Huntley had been formally ruled out, Atkinson, Kunowski and Imiela were also not being treated as suspects.Reuse content