An Ulverstone woman called triple zero shortly before her friend's body was found inside her home.
Police received the call about 3am Tuesday with reports of a prowler at the woman's Main Street home.
By the time police arrived, a 22-year-old had been stabbed to death.
The victim had travelled down to Tasmania a few weeks ago to stay with her friend, also in her 20s, and the friend's two young children - who were inside the home at the time of the murder.
Detective Inspector Kim Steven said there was "no known connection" between the victim and a man who was arrested hours later, about 200 metres down the street.
"About 3am this morning we were called to an incident on Main Street, here in Ulverstone," he said.
"As a result of that we have been running an inquiry this morning, and that inquiry is still going."
READ MORE: Former Tasmanian dies at national race
He confirmed police received a triple zero call from the friend of the victim.
"The police were on the phone to her for some 11 minutes, and during that time uniformed police have arrived and in that time they've located the deceased in another room of the house," the detective said.
"We've notified the next of kin of the deceased and they're obviously distraught. We're trying to keep him up to date as much as we can."
Detective Inspector Steven said the injuries were consistent with knife wounds, and police were still searching for a weapon.
"(The friend) is obviously distraught to have witnessed something like that in her own home," he said.
Detective Inspector Steven was cautious with detail in the "early stages" of the investigation, but confirmed the street would remain closed for another 24 hours so as to allow for luminol tests - a kind of blood test performed in the dark.
Police did not release further details about the man who was taken into custody and charges have not yet been laid.
"There was evidence located that indicated that there was probably a person at that house that we needed to talk to," Detective Inspector Steven said.
He would not reveal what the evidence was.