"We are treating this as a terrorist investigation which is being led by counter-terrorism officers with support from Greater Manchester police," said Greater Manchester police chief constable, Ian Hopkins, at a news conference on Tuesday, referring to the stabbing of three people – including a police officer – at Manchester Victoria station on Monday evening.
"They were working through the night to piece together the details of what happened and to identify the man who was arrested," he added.
Hopkins said counter-terrorism officers have arrested a 25-year-old man who remains in custody under Britain's mental health act and that they are searching an address near the city center "which is believed to be where the man had most recently been living".
During the attack, a woman suffered injuries to her face and abdomen and a man was wounded in the abdomen, while a British Transport Police officer sustained a stab wound to the shoulder.
Local witnesses had heard the man shouting Daesh-inspired slogans at the time of the attack.
No group has so far claimed responsibility for the attack.
British Prime Minister Theresa May praised emergency services for their "courageous response" in swiftly tackling the suspect.
"My thoughts are with those who were injured in the suspected terrorist attack in Manchester last night," she wrote on Twitter.
Britain is on its second level of security alert following three terrorist attacks last year. The country is specifically at a risk of attacks by nationals who have returned home from engagements in militant activity in the Middle East.