Suzanne Armstrong, 28, and Susan Bartlett, 27, were found dead in their Collingwood home in January 1977, each with dozens of stab wounds.
Ms Bartlett's 16-month-old son was found unharmed in his cot.
On Saturday, it was revealed a 65-year-old man was arrested at an airport in Rome on Thursday evening.
The dual citizen of Australia and Greece was taken into custody and Victoria Police is now seeking to extradite him.
The two friends were last seen alive on January 10, 1977, and their bodies were found three days later.
The killings became known as the "Easey Street Murders" and in 2017 Victoria Police offered a $1 million reward to catch those responsible.
Victoria Police Chief Commissioner Shane Patton described the arrest as an important breakthrough in the 47-year investigation but warned there was "still some way to go".
"This was a crime that struck at the heart of our community – two women in their own home, where they should have felt their safest," he said.
The commissioner said Homicide Squad detectives and other police had worked tirelessly on the case for decades.
"I also want to recognise the enduring resilience of both the Armstrong and Bartlett families, who have grieved for over four decades and no doubt this will be a very emotional time for them.
"I hope this arrest brings you closer to the answers you so richly deserve and have waited so long for."
Investigators say the probe is ongoing and further information is set to be made public in the future.
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