His body was found in Cregg Wood, a 10,000 acre forest, two miles from Whitegate, Co Clare. His burnt out car had been discovered on a jetty at Lough Derg, also close to Whitegate.
The search was still continuing for artist Imelda Riney, 29, and her son Liam, aged three, from Whitegate, who have been missing for a week.
The incidents were linked because the cars of both Ms Riney and Father Walsh were found burnt out only miles from where they all disappeared.
Irish police were last night questioning Brendan O'Donnell, who was arrested on Saturday after a 17-year-old woman was taken hostage at gunpoint in County Clare.
Mr O'Donnell had been named on Friday as a man police sought in connection with the disappearance of Father Walsh, Ms Riney and her son.
Mr O'Donnell was believed to have been spotted in Ms Riney's car with her and her son when they were last seen on Friday over a week ago. Mr O'Donnell denied yesterday that he had any knowledge of the missing trio.
As he was taken into Loughrea police station, O'Donnell shouted to reporters: 'I'm being blamed in the wrong. I know nothing of the woman and her child.'
Police spent yesterday in a massive hunt for the missing people. Divers searched the waters of Lough Derg, where Father Walsh's car was found on Friday morning and Irish troops were also sent to help in the search.
A frantic hunt was also taking place in dense Irish forest, following the abduction of the 17-year-old girl, Fiona Sampson, who was taken from her Whitegate home at gunpoint in her nightdress early yesterday morning. She was the fourth person in just over a week to disappear from the rural communities beside the River Shannon.
Detectives said that when the girl was found she was shocked and bleeding from cuts to her feet after being dragged barefoot through the woods, but was otherwise unharmed.
The decision to name O'Donnell as the person they wanted to question about the suspected abduction of Ms Riney and her son had been taken earlier as relatives and friends became increasingly desperate about their plight.
Superintendent Pat O'Boyle, who is leading the search on the Clare side of the county boundary, had previously stressed that there was no evidence of a criminal offence.
Initially sought only as a witness, the man was believed to have been seen last Friday week in the back of Ms Riney's car around the time of her disappearance.
The hunt for Ms Riney and her son began after her estranged husband Val Ballance arrived at her cottage and found the kettle boiled dry on the stove, the door unlocked and the family's pet dog unusually running wild outside. Her eldest son, Oisin, aged six, was still at school.
At first there was no hard evidence linking the disappearance of Ms Riney and her son with that of the reliable, conscientious Fr Walsh, 37, who vanished after he had left a neighbour's home by car around midnight on Tuesday. But there were obvious parallels - neither was able to leave any note or message; and both the burnt out cars were found with the number plates missing.
On Friday, a local farmer found the missing number plate from Ms Riney's car near Eyrecourt, where Fr Walsh disappeared, then discovered a working lamp, milk carton and biscuits in local woods. Police by then knew the identity of the man they were seeking, and with his known family ties to that village, they publicly linked him for the first time with both cases.
By yesterday, Air Corps helicopters were using heat-seeking equipment in the search for the missing mother and child and priest. The operation was made doubly difficult by the inaccessible terrain, a mixture of dense forest, bogland and hills.
The incidents of the past few days have shocked not only local people but the influx of artists and writers - some from abroad - who have been drawn to the undisturbed lakeside tranquillity of the communities around Lough Derg and other parts of the Shannon waterways. However, the recent events seem to owe more to an episode of the American drama Twin Peaks than the normally peaceful life of the sparsely populated Slieve Aughty Mountains region, that lies to the west of the Shannon.
Last night Irish police said they expected a post-mortem to be carried out on Father Walsh today.