The arrest in Manhattan follows raids on two of his properties in Los Angeles and Miami in March as part of an "ongoing investigation" into sex trafficking by authorities.
Mr Combs's attorney, Marc Agnifilo, said they were "disappointed" by the arrest and his client was an "innocent man".
The musician has faced a series of allegations from sexual assault to abuse, including by his ex-partner Casandra "Cassie" Ventura. He has denied all the claims against him.
His arrest was made in connection with an ongoing investigation by US homeland security officials, multiple law enforcement sources told CBS.
US Attorney for the Southern District of New York Damian Williams confirmed the arrest in a statement on Monday night.
"Earlier this evening, federal agents arrested Sean Combs, based on a sealed indictment filed by the SDNY," the prosecutor said.
He said the office plans to unseal the indictment on Tuesday morning and we "will have more to say at that time".
Combs faces a number of civil lawsuits, including allegations that he raped an underage girl and tried to "groom" a producer and force him to have sex with another man.
His attorney said on Monday night that Mr Combs was looking forward to "clearing his name in court".
“We are disappointed with the decision to pursue what we believe is an unjust prosecution," Mr Agnifilo said in a written statement to the BBC.
“Sean 'Diddy' Combs is a music icon, self-made entrepreneur, loving family man, and proven philanthropist who has spent the last 30 years building an empire, adoring his children, and working to uplift the black community."
The rapper's legal problems began in November 2023 when Ms Ventura filed her lawsuit.
Two other women filed lawsuits that same week alleging abuse and assault - including one who said Mr Combs had choked her for so long that she passed out.
He denied all the allegations at the time and a spokesperson for the rapper called the lawsuits a "money grab".
Then in December, another civil lawsuit alleged a woman had been "sex trafficked" by Mr Combs and two other men when she was 17 years old.
In February this year, new accusations came to light in a civil lawsuit filed by his former producer Rodney Jones Jr, who said Mr Combs made unwanted sexual advances and tried to "groom" him into having sex with others.
Mr Combs denied the allegations but one month later, his properties were raided. The musician was stopped at an airport in Miami as he was preparing to leave for the Bahamas and handed over electronics to authorities.
Many of the lawsuits came shortly before the expiration of the New York Adult Survivors Act, which temporarily allowed people who said they were sexually abused to file claims, even after the statute of limitations had expired.
In May, CCTV footage posted by CNN appeared to show the rap mogul attacking and beating Ms Ventura, an episode that was chronicled in her civil suit.
Mr Combs - who has also gone by the names Puffy, Puff Daddy, P Diddy, Love, and Brother Love – is one of rap's most successful moguls.
Christal Hayes