Israeli police have re-arrested Malka Leifer, the former Melbourne school principal who is wanted in Victoria on 74 charges of child sexual abuse, alleging she faked a mental illness in order to avoid extradition to Australia.

Ms Leifer is accused of sexually abusing several pupils while she was a teacher and principal at the ultra-orthodox Adass Israel girls school in Melbourne.

In 2008, when the allegations were first raised, Ms Leifer fled to Israel.

She was then arrested by Israel police in 2014, when Australia filed a request for her extradition.

Ms Leifer was released on bail and managed to avoid every single one of her extradition hearings in the last three years, claiming she suffered from panic attacks and anxiety and was too unwell to face the court.

Two weeks ago, she again claimed mental illness during her most recent appearance before a psychiatric review board.

Police launched secret investigation

Child protection campaigner Manny Waks and other protesters outside an Israeli court hearing on Ms Leifer's extradition in February 2016. ( Supplied )

But Israeli police have now revealed that they had been conducting a secret undercover investigation into Ms Leifer's claims of mental illness.

In a statement after her arrest at a settlement in the occupied West Bank on Monday morning, Israeli police said they arrested a female in her 50's "suspected of obstructing court proceedings and attempting to hide evidence of a case".

"We have found new evidence that shows us she is capable of standing trial," Israeli police spokesman Micky Rosenfeld told the ABC.

"This has been an ongoing investigation in coordination with Australian authorities.

"The arrest was made based on the evidence we have gathered over the last few weeks."

Israeli police said that "during 2017 there were indications that the suspect was pretending to be suffering from mental illness in order to avoid the extradition process and as a result, the police opened again an investigation that led to her arrest this morning".

The undercover investigation reportedly began following an Interpol request.

Israeli police said the extradition process had now restarted.

"It will all be coordinated with the Israeli national police, the Australian authorities and the courts here in Israel to make sure she will stand trial in Australia within the next couple of weeks or possibly months."

'Elation and relief' for alleged victims

Former Adass student Dassi Erlich welcomed the arrest. ( Supplied )

The former principal's alleged victims welcomed the news of Ms Leifer's arrest.

"It is with a mixture of elation and relief coupled with anticipation towards the future, that we welcome the news of Malka Leifer's arrest," former Adass student Dassi Erlich said.

"We see this as a very important breakthrough in our long journey to achieve justice.

"We are relieved that Malka Leifer's arrest removes her from posing a potential threat to other vulnerable children.

"It has been a very long 10 years since Malka Leifer fled Australia.

"We are hopeful that this is a turning point in the extradition process."

In September, during a visit to Israel, Australian Prime Minister Malcolm Turnbull personally lobbied Israeli Prime Minister Benjamin Netanyahu about the case.

Mr Turnbull also met with Ms Leifer's alleged victims before travelling to Israel.