Two other youths were also arrested during the evening, and all three were being held at separate police stations on Merseyside.
It is understood that the others were being questioned as witnesses after refusing to co-operate voluntarily with the police.
A large number of local youths gathered outside the murder investigation headquarters in Bootle last night. Two were arrested for public order offences after extra officers had been drafted in to move them on.
A jeering crowd had also gathered to watch the arrest in Kirkdale.
Earlier it had been revealed that James had been seen crying, suffering from a head injury and being dragged along by two youths shortly after his abduction from a shopping centre in Bootle, near Liverpool. Police said they were horrified that nobody had intervened as the boy was led through the streets while so obviously distressed.
James's body was found on a railway embankment three miles from the precinct on Sunday. He was abducted while his mother Denise was yards away in a butcher's shop. A security video showed two boys leading him away.
A second security video showing James being led along by the two boys who abducted him on Friday afternoon has also been handed to police.
The video, taken at the offices of a construction company about half a mile from the shopping precinct, shows James either struggling or being swung between the two boys. The film is jerky and of poor quality and experts will now try to enhance the images to help get a clearer picture of the boys, thought to be aged about 12 and 13. The American space agency Nasa has offered its technology to help with this.
Detective Superintendent Albert Kirby, who is leading the inquiry, said that three girls and a man could be seen crossing the road at a junction near by. He appealed for them to come forward.
Mr Kirby said that witnesses who saw James at an underground reservoir near the railway line where his body was found said that he had bruises and grazes to his forehead.
One woman told the Liverpool Echo newspaper yesterday that she saw James clearly upset as she walked her dog at the reservoir at Breeze Hill about 50 minutes after he was abducted.
The woman, 73, said: 'I looked over the edge and saw this little boy with two older boys. He was crying and screaming and I asked what was the matter. The other two said they had just found him and he had fallen and hit his head. He had a bump on his head and a bump on the side of his forehead. They said they were taking him to Walton Lane.'
The woman said her dog was barking and trying to get at the three children, and she had to pull it away. 'The little kiddie was screaming his head off and I could not go too close because he was frightened of the dog.'
She said she reported what she had seen to the police on Friday night but they did not interview her until 24 hours later. Merseyside Police said they had been inundated with inquiries and the woman had not answered the door the first time officers called.
Roy Barter, the Merseyside coroner, described the killing as 'the most dreadful and shocking murder' he had come across in 25 years in his job when he opened and adjourned the inquest into James's death yesterday.
Coroner shaken, page 2Reuse content