An alleged victim says he was abused for years
Police said Paul Shanley had been arrested in southern California on suspicion of three counts of child rape.
It came after the victim notified officials in Massachussets, where the alleged incidents took place between 1983 and 1990.
America's most influential cardinal has been accused of knowingly protecting the priest.
The Catholic Church worldwide has been grappling with accusations that it covered up abuse by priests, and last week the Vatican held an emergency meeting with American cardinals.
In the latest allegations to emerge, the Roman Catholic Church in Hong Kong admitted that three priests have been accused of molesting children.
The acknowledgement came after the allegations appeared in a local paper.
Pope John Paul II has said there is no place in the priesthood and religious life for those who would harm the young.
Court case
Police in San Diego said Mr Shanley, 71, was arrested at his home without incident.
The criminal charges are the first to be filed against the retired priest.
However he is the focus of a civil suit brought against the archdiocese of Boston and Cardinal Bernard Law, who are alleged to have failed to protect children from being abused by priests.
The alleged victims include Greg Ford - now 24 - who says he was repeatedly abused by Mr Shanley while the priest was serving in the parish of Newton, which is outside Boston.
Cardinal Law is due to give a sworn statement in the case next month.
Mr Shanley has not spoken publicly since the case began.
His work with street children in California gave him ready access to young children.
In the US, almost 200 Catholic priests have been suspended in 18 different states since the child abuse scandal broke in January.
Anger in Hong Kong
In Hong Kong, police are to decide after their investigation whether there is enough evidence to press charges over the allegations, which cover the last three decades.
The BBC's Damian Grammaticas in Hong Kong says there is anger that the Church's admission came only after allegations appeared in the South China Morning Post - the territory's English-language daily.
He says the local Catholic authorities have been condemned - like their counterparts in the US - for not publicly acknowledging cases of paedophilia and for trying to deal with them behind closed doors.
The Catholic Diocese of Hong Kong confirmed that two priests were suspended from public ministry while. A third was accused of sexual abuse elsewhere before arriving in Hong Kong. He had now been recalled.
The statement also announced that the Church in Hong Kong - which has an estimated 250,000 Catholics - would now adopt a "No tolerance Policy".