The pope's butler has been arrested by Vatican police on suspicion of leaking a large number of confidential letters addressed to Benedict XVI which have lifted the lid on alleged corruption and nepotism at the Holy See.

A Vatican spokesman declined to confirm the butler's arrest, which was widely reported by Italian media on Friday, stating only it had arrested a person discovered in illegal possession of "confidential documents".

Paolo Gabriele, 46, who has worked as Benedict's butler since 2006, was reportedly taken into custody after investigators found a mass of documents in the Vatican apartment he shares with his wife and three children.

The arrest comes a month after the Vatican gave an investigative team led by Cardinal Julian Herranz, a member of Opus dei, a full "pontifical mandate" to join Vatican police in rooting out the perpetrators of what has been dubbed Vatileaks.

Gabriele is a member of the 85-year-old pontiff's closest circle of helpers, assisting him in his papal apartment at the Vatican alongside four female members of the Italian religious movement Comunione e Liberazione who cook and clean.

The Rome-born butler is now in custody in the Vatican's cells.

"We have cells," said Vatican spokesman Father Federico Lombardi. "It is a simple structure, since this is a small state, but we have them."

Among the most serious leaks published this year are in a letter from Carlo Maria Viganò, the former deputy governor of Vatican City, denouncing inflated contracts with friendly companies, false invoicing and missing cash.

Further revelations were published this week in a book by a journalist, Gianluigi Nuzzi, who described how an unnamed whistleblower sent emissaries to sound him out before they held secret meetings in an unfurnished, rented flat near the Vatican. "I wore a USB round my neck for six months with the leaked documents on it," Nuzzi told the Guardian. "It was like something out of a film."

In the book, the source says he was coming clean because "hypocrisy within the Vatican goes unchallenged and scandals multiply".

The book, which was described as criminal by the Vatican, alleged that the editor of the Vatican's newspaper started a gay smear campaign against a rival editor, with the help of a newspaper owned by the Berlusconi family.

Letters depict collusion between the Berlusconi government and the Vatican over how to avoid EU pressure to make the Catholic church pay tax on its properties.

Huge cash donations to the pope from banks and a TV presenter are described, as a well as €100,000 (£80,000) truffle sent by a businessman which was donated to the poor.

"After Pope John Paul II's death I started putting aside copies of some documents that came into my possession thanks to my work," the source tells Nuzzi.

"Initially I did it sporadically. When I saw that the truth coming out in the newspapers and official speeches did not match the truth in the documents I put everything aside in a folder to try and investigate and understand."

The source said his growing disenchantment with the "personal interests and hidden truths" at the Vatican was shared by other people living and working in the city state, but "nobody knows who all the others are".

The letters place the Vatican's secretary of state, Cardinal Tarcisio Bertone, in a bad light but spare the pope. "The source backed Benedict's reforming spirit, the problem is that the pope has not been able to achieve things very quickly," said Nuzzi. "I don't believe they would have arrested him if they didn't have real proof, but I believe he is not the only guilty one," said Marco Tosatti, a Vatican expert at La Stampa newspaper. "I imagine he will go before an Italian court and risks 20 years for stealing correspondence from a head of state."

Other letters reveal a row over improving transparency at the Vatican bank after it was implicated in the 1980s in the collapse of the Banco Ambrosiano whose chairman, Roberto Calvi, who was found hanging under London Bridge.

On Thursday, the Vatican bank's president Ettore Gotti Tedeschi, who was brought in to improve transparency, was ousted "for not having carried out various responsibilities of primary importance regarding his office," the Vatican said in a statement.