Three-year-old Cheryl Grimmer went missing from a shower block at a New South Wales beach in 1970.
A 63-year-old man, originally from Britain, was arrested in Melbourne on Wednesday. Detectives said he would be charged with abduction and murder.
Despite the breakthrough, police doubt Cheryl's body will ever be found.
Cheryl disappeared from Fairy Meadow beach in Wollongong, a city south of Sydney, on the afternoon of 12 January 1970.
She was there with her mother, Carole, and her brothers Ricki, seven, Stephen, five, and Paul, four.
The family had only recently emigrated to Melbourne from Bristol, in south-west England.
When the weather worsened, Mrs Grimmer sent the children to shower at the public block about 100m (328ft) away.
Moments later, Ricki ran back and reported Cheryl would not emerge from the girls' change room. She was never seen again.
"She was gone in just a minute or two," Ricki Grimmer said last year.
"It's something I still live with every day."
Cheryl's parents have since died, never knowing what happened.
Cheryl's disappearance sparked a massive search at the time, but it failed to provide a breakthrough.
Last year, detectives re-examined the case and revealed they had a new clue. Three witnesses had said they saw a teenager "loitering" near the scene.
On Wednesday, detectives held a man in custody after he went to a police station in Frankston, in outer Melbourne, for questioning.
Originally from the UK, the man would have been 16 in 1970.
Det Insp Brad Ainsworth, from Wollongong police, confirmed the man "was a person of interest" in the initial investigation almost 50 years ago.
The detective said he doubted Cheryl's body would ever be found.
"I'm not going to get into the specifics, of the actual details of the offences but I can say that they are quite horrific," he said.
The man in custody is expected to appear in a Wollongong court on Friday.
A man has been arrested over one of Australia's longest-running mysteries - the suspected murder of a UK-born toddler nearly 50 years ago.