Sources told AFP that Schembri had been called in for questioning by police after being fingered by the main suspect in the case, prominent businessman Yorgen Fenech.
In another blow to the government on Tuesday, Economy Minister Chris Cardona's ministry said in a statement that he was "suspending himself with immediate effect from his position as minister pending the investigations and proceedings going on right now".
His detention followed that of a middleman in the murder, Melvin Theuma, who on Tuesday was given immunity to expose those involved. Schembri denied acting badly.
Ms Caruana Galizia (53), whose blog dished the dirt on politicians of all stripes, was killed by a vehicle bomb in 2017.
But, according to a person briefed on the investigation, he started to provide further information which would "bring the house down", with substantial details of corruption and the complicity of other senior figures in the murder.
"The situation is very serious", Deputy Prime Minister Chris Fearne told journalists as he entered the meeting.
He said that Schembri was "the first name we gave to the police two years ago".
Fenech is seeking immunity for disclosing what he knows about the case.
Neither Fenech nor his lawyers have made any public comment since his arrest.
Schembri and Mizzi had been mentioned in leaked documents as allegedly owning offshore companies which were due to receive 5,000 euros (5,500 USA dollars) a day from 17 Black, an offshore company owned by Fenech.
It is not known if any fund really changed hands.
It almost saw a punch-up in parliament, when two of Muscat's MPs rushed at opposition deputies, who had chanted "Mafia!"
All three deny any wrongdoing.
Caruana Galizia's son Matthew tweeted that Muscat "simply can not be trusted to not obstruct justice". "He has done so for too long", Ms. Caruana Galizia's son Matthew wrote on Twitter. He lost that ministry portfolio, but after the 2017 election which kept Muscat in power, Mizzi became tourism minister, his current post.
A regular session of parliament was suspended on Tuesday as opposition lawmakers heckled the government benches, yelling "mafia" at their political opponents.
"Joseph Muscat's moral authority has been compromised to the point of no return after failing to sack Keith Schembri despite mounting evidence of irregular behaviour before he resigned under duress".
Saying he must help his nation through this "turbulent time".
At the receiving end of intimidation and threats, Caruana Galizia received police protection several times but refused to be put under permanent guard, judging that it would make her job impossible. Six months before her death, the two men said they would sue her for libel over allegations she made about their Panama concerns.