BBC North of England Correspondnet Kevin Bocquet: "Through her soliciter, Mrs Woodward has denied any wrong doing"

Mr and Mrs Woodward were held a week ago and released on bail by Cheshire Police.

Their daughter Louise, 21, from Elton, near Chester, was convicted at a court in Boston, Massachusetts, in November 1997, of second degree murder after baby Matthew Eappen died while in her care.

An appeal fund was launched to help with the costs of fighting her case and thousands of well-wishers contributed to it.

The verdict was reduced to manslaughter by the trial judge and Woodward returned to Britain last summer, after losing an appeal in the Supreme Judicial Court.

But police in Cheshire, helped by the FBI, launched an investigation into claims believed to relate to an invoice for more than £9,000 which Louise's mother submitted to the fund for accommodation at the home of American lawyer Elaine Whitfield Sharp.

The investigation was launched after what detectives said was a complaint from a member of the public.

Couple bailed

Mrs Woodward has denied any wrong-doing in connection with the fund set up to help the family with their huge legal bills and living expenses during the trial and the time spent in Boston awaiting the result of the appeal.

Cheshire Police refused to disclose the names of those arrested but said they had been bailed to return to Chester police station on 1 July.

The BBC's Jane Hughes discusses the arrests on News24

The force would only say officially: "The Cheshire Constabulary continued its inquiries into allegations of the running of the Louise Woodward Family Trust.

"Last Thursday two people were arrested and bailed to retured to Chester Police Station."

But the Press Association news agency reports that "sources close to the investigation" named the pair as Louise's parents, who are now separated.

There is no suggestion that Louise, who is now studying law at South Bank University in London, is involved in the police investigation. Mrs Woodward, at her home in Cheshire on Thursday, made no comment on the news of the arrests.

But a statement from her solicitor, Sean Sexton, said: "Susan Woodward has been informed by the police that they will seek advice from the Crown Prosecution Service once their inquiries are complete and she remains confident that she will be vindicated in due course.

Elaine Whitfield Sharp with Louise Woodward during the trial

"She co-operated fully with the police in their inquiries and vigorously denied the allegations of dishonesty made by Elaine Whitfield Sharp.

"She took the opportunity to give the police her side of the story and an insight into the motives of Elaine Whitfield Sharp in making false allegations against her and her family.

"It is no doubt significant that the person who has made the complaint which the police are investigating has asked to remain anonymous."

Mrs Sharp was told about the arrests at her law practice outside Boston, on Thursday. She said: "It may seem strange after what they have said about me but I have no interest in the prosecution of Gary and Sue Woodward.

"I just want people to understand that I did not charge her a penny for staying with me and that I did not lie."