Letterkenny Garda station
It is understood Mr Donnelly was arrested at a republican commemoration in west Donegal on Sunday afternoon.
A second man who
Gardaí say the investigation is ongoing.
He was murdered just four months after being exposed as a British agent.
Gardaí are continuing to appeal to anyone with information in relation to the murder to contact them at the incident room at Letterkenny Garda Station on 074 9167100, the Garda Confidential Line at 1800 666111 or any Garda station.