Police in Milan say they have arrested a 39-year-old Italian woman, who has worked for Cardinal Angelo Becciu, a senior Vatican official who was demoted last month over embezzlement claims.Cecilia Marogna says she was paid ā¬500,000 ($587,000; Ā£454,000) by Cardinal Becciu.
Ms Marogna was arrested after an Interpol warrant was issued at the Holy Seeās request, according to reports.
Both Ms Marogna and Cardinal Becciu have denied any wrongdoing.
In interviews with Italian media in recent days, Ms Marogna confirmed that she had been paid ā¬500,000 by Cardinal Becciu through a company she operated in Slovenia. She said she received the money to provide āparallel diplomacyā to help missionaries in conflict areas.
A senior Vatican source told Reuters news agency that Ms Marogna was suspected of āembezzlement and aggravated misappropriation in complicity with othersā.
The cardinal allegedly authorised the payments to Ms Marogna while serving as number two in the Vaticanās Secretariat of State, which manages the Churchās donations.
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The cardinal was forced out last month by Pope Francis.