The woman, who has not been named, is believed to be from the Midlands - police have said she is "connected to the child".
She is being questioned by detectives at Friar's Park police station in Carmarthen.
It follows a huge investigation by officers after the clothed body of a two-year-old boy was found submerged in a rock pool at Coppet Hall Point beach near Tenby, Pembrokeshire, at 1035 BST on Tuesday.
The child has not been formally identified but a post mortem has confirmed the cause of death as drowning.
Holidaymakers and hoteliers are still being questioned about whether they had seen an Afro-Caribbean woman in the area with a child between 1930BST on Monday and 1030BST Tuesday.
Room for night
One witness was asked for directions by an Afro-Caribbean woman with a child in a buggy near Saundersfoot railway station on Monday evening.
A hotel owner said a woman on her own of that description had asked him for a room that night.
He had said he was full for the night and she had moved on to another guesthouse further up the hill, where police were carrying out their inquiries on Wednesday.
Detective Chief Inspector Mel Evans, who is leading the investigation, said: "It is believed that both the deceased and the detained woman involved originate from the Midlands."
A child's buggy was found near to the body and a major air and sea search of the resort's coastline was started by Milford Haven Coastguard but called off at about 1600 BST.
Dyfed-Powys Police are treating the death of the boy, of African or Caribbean origin, as suspicious and have been trying to trace his parents.
They are keen to hear from anyone who may have seen a woman with a young child around Saundersfoot station between 1930 BST on Monday and the following morning.
More than 20 officers are working on the case.
The picturesque sandy stretch of beach on which the boy's body was found is close to the resorts of Tenby and Saundersfoot and is visited by thousands of tourists every year.
Coastguard officers launched the RAF helicopter search fearing the child's parents could be missing in the sea, but it was later halted.
Police spokesman Dai Davies said officers were "keeping an open mind" as to the circumstances leading up to the boy's death.
Local vicar Canon Michael Butler said the community had been shocked by the find.
"This little boy is unknown - he has no name or family, we don't know where he is from," he said.
"This is a great sense of shock and disbelief that this had happened on this beautiful beach.
"Then, the reality came home and, with that, a terrible pain at the untimely and tragic death of an unnamed infant child."
Anyone with information should contact Tenby Police Station 01834 842303 or Pembrokeshire HQ at 01437 763355.