Suzanne Armstrong, 28, and Susan Bartlett, 27, were found dead with multiple stab wounds in their home on Easey Street in Collingwood in January 1977.
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.
The dual Australian and Greek citizen was taken into custody and Victoria Police is seeking to extradite him.
The two friends were last seen alive on January 10, 1977. Their bodies were found three days later. The killings became known as the "Easey Street Murders".
Police have been investigating the brutal murders for almost half a century. (Joel Carrett/AAP PHOTOS)
In 2017, Victoria Police offered a $1 million reward to catch those responsible.
The women's families said it was difficult to express their level of appreciation to investigators who tirelessly pursued answers and justice for so long.
"The perseverance and dedication required to achieve the result today is something to truly behold," they said in a statement released on Saturday.
"For always giving us hope and never giving up, we simply say, thank you."
The two friends attended school together in Benalla, in Victoria's high country, and their families said their deaths changed many lives "irrevocably".
"For two quiet families from country Victoria it has always been impossible to comprehend the needless and violent manner in which Suzanne and Susan died," they said.
"We will be forever grateful for the support and understanding shown to us by our friends and family over the past 47 years."
Chief Commissioner Shane Patton praised the resilience of the Armstrong and Bartlett families. (Diego Fedele/AAP PHOTOS)
Police Chief Commissioner Shane Patton described the arrest as an important breakthrough, 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," Mr Patton said.
"I hope this arrest brings you closer to the answers you so richly deserve and have waited so long for."
Investigators say further information on the investigation is set to be made public in the future.
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