Mersane Warria, 37, is talking to officers. She has not been charged.
She was found at her home with stab wounds, alongside the bodies of the eight children. A coroner is due to conduct post-mortem examinations.
The victims were aged 18 months to 14 years. Police have not said how they died. The eighth child was her niece.
Confirming the arrest, Cairns Detective Inspector Bruno Asnicar said: "The 37-year-old mother of several of the children involved in this incident has been arrested for murder overnight and is currently under police guard at the Cairns Base Hospital."
Identified by the local media, Ms Warria remains in a stable condition in hospital recovering from stab wounds.
"She is awake and lucid and able to speak," Detective Inspector Asnicar said.
"At this stage we're not looking for anybody else - we're comfortable that the community at large is safe," he added.
Police found a number of weapons at the scene, including knives, which are being examined.
The bodies were reportedly discovered by the mother's 20-year-old son arriving at the home on Friday morning.
Police have dismissed reports the family had been investigated by social services saying it was "not a problem house".
Memorials have sprung up outside the home in the Manoora district of Cairns.
Australian Prime Minister Tony Abbott said in a statement it was an "unspeakable crime".
These were "trying days for our country", he added.
The deaths come just days after the siege of a cafe in Sydney which ended with the gunman and two hostages dead.
The mother of seven of eight children found dead at a house in Cairns, Australia, has been arrested on suspicion of murder.