Eight more people were hurt in the blaze in Devizes, Wiltshire.
Now a man in his 20s has been detained and is in custody for questioning.
Wiltshire Police confirmed the woman in his 50s died in hospital after the blaze, which started at around 1am this morning, in Waiblingen Way.
A spokesman for the force said: "The investigation was this morning taken on by the Brunel Major Crime Investigation Team (MCIT) assisted by CID and local community officers.
"This evening, a local man aged in his 20s, was arrested on suspicion of murder.
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"He has been taken to custody in Melksham for further questioning.
"A cordon remains at the scene and is likely to be in place for a number of days.
"A mobile police point is open in the street for any residents with concerns.
"Enquiries continue and anyone who may have information about the incident should call 101 and quote log number 13 of December 17."
The severity of the injuries to the eight other residents remains unclear.
The investigation continues.