Sussex Police spokesman Nick Sandford said: "Police can confirm that a Littlehampton man in his 40s, held in connection with the Sarah Payne murder inquiry is no longer being questioned by detectives.
Roy Whiting, 41, was arrested at Crawley on Monday but released after 24 hours.
He has now been returned to the Prison Service, which is holding him on remand pending a court appearance on an unrelated charge.
Sussex Police spokesman Nick Sandford said: "Police can confirm that a Littlehampton man in his 40s, held in connection with the Sarah Payne murder inquiry is no longer being questioned by detectives.
"He has been released on police bail, pending further inquiries."
It is the second time the local mechanic has been questioned and released on police bail in connection with the inquiry.
Sarah disappeared from a field while playing with her brothers and sister close to her grandparents' home near East Preston, West Sussex, on 1 July.
Mr Whiting was first arrested a day later, but was released three days afterwards without charge.
He is not believed to have returned to his Littlehampton home since the first arrest and was living with his father in Crawley, West Sussex, before the second arrest at noon on Monday.
A memorial service for Sarah is due to be held at Guildford Cathedral on 12 August.