The former executive, Rebekah Brooks, and Scotland Yard chief, Paul Stephenson, have denied wrongdoing.
Brooks, a well-known social and political insider, dined at Christmas with Prime Minister David Cameron. His Conservative-led government is now facing increasing questions about its relationship with Murdoch's media empire.
The arrest of the 43-year-old Brooks, often described as a surrogate daughter to the 80-year-old Murdoch, brought the British police investigations into the media baron's inner circle for the first time. She was questioned and released on bail some 12 hours later, Scotland Yard announced early Monday.
It raises the possibility that Murdoch's old friend Les Hinton, who resigned Friday as publisher of The Wall Street Journal, or his 38-year-old son and heir apparent, James, could be next.
Until her resignation Friday, Brooks was the defiant chief executive of News International, Murdoch's British newspaper arm, whose News of the World tabloid stands accused of hacking into the phones of celebrities, politicians, other journalists and even murder victims. In the tumultuous last two weeks, she had kept her job even as Murdoch shut down the 168-year-old News of the World and tossed 200 other journalists out of work.
On Sunday she showed up for a prearranged meeting with London police investigating the hacking and was arrested. She questioned on suspicion of conspiring to intercept communications - phone hacking - and on suspicion of corruption, which relates to bribing police for information.
Hours after Brooks' arrest, Stephenson said he was resigning as commissioner of London's force because of "speculation and accusations" about his links to Neil Wallis, a former News of the World executive editor who was arrested last week in the scandal.
"I had no knowledge of the extent of this disgraceful practice and the repugnant nature of the selection of victims that is now emerging," Stephenson said. "I will not lose any sleep over my personal integrity."
Brooks' arrest was the latest blow for Murdoch, the once all-powerful figure courted by British politicians of all stripes. Now Murdoch is struggling to tame a scandal that has already destroyed News of the World, cost the jobs of Brooks and Hinton and sunk the media baron's dream of taking full control of a lucrative satellite broadcaster, British Sky Broadcasting.
Rupert Murdoch is eager to stop the crisis from spreading to the United States, home of many of his most lucrative assets - including the Fox TV network, 20th Century Fox film studio, The Wall Street Journal and the New York Post. The FBI has already opened an inquiry into whether 9/11 victims or their families were also hacking targets of News Corp. journalists.
On Sunday, Murdoch took out full-page ads in British newspapers promising that News Corp. would make amends for the phone hacking scandal, with the title "Putting right what's gone wrong." News Corp. vowed there would "be no place to hide" for wrongdoers.
That followed a full-page Murdoch ad Saturday declaring, "We are sorry."
