Peter Ball, 80, was held at his home near Langport, Somerset, on suspicion of eight sex offences against eight boys and young men aged from 12 to their early 20s, sources said.
The alleged abuse is said to have happened within the scandal-hit Diocese of Chichester in East Sussex and elsewhere in the late 1980s and 1990s.
A second man, an unnamed 67-year-old retired priest, was also detained at his home this morning near Haywards Heath, West Sussex, on suspicion of separate sex offences against two teenage boys in East Sussex between 1981 and 1983, Sussex Police said.
Police said the allegations did not involve the two men allegedly acting together. The arrests follow a review and subsequent inquiry over the past six months by a team of Sussex Police detectives.
The investigation followed receipt by police in May this year from Lambeth Palace of two reports from a CofE safeguarding consultant.
They contained reviews of Church files relating to safeguarding matters of young people in the Diocese of Chichester during the 1980s and early 1990s.
Officers described it as a “very complex inquiry” during which many people, who are all now adults, have had to be traced along with witnesses and records.
Police said there were no allegations of recent or current offending, and there was no suggestion that any young people are at risk.
Detective Chief Inspector Carwyn Hughes, of Sussex Police, who is leading the investigation, said: “The Church of England, including the Diocese of Chichester, are co-operating fully with police. Although the matters referred to are still subject of police investigation, Sussex Police make it clear that the force will always take seriously any allegations of historic sexual offending, and every possible step will be taken to investigate whenever appropriate. Allegations of historic offences are treated just as seriously as any more recent offences.”