The iPod, believed to have been found in a shop changing room, is not thought to have contained any sensitive material. Manchester City declined to comment on Wednesday.
A police spokesman said: "A 29-year-old man was arrested on suspicion of blackmail as part of an investigation by police, on Jan 31. He has been bailed until March 4 and inquiries continue."
The incident heaps further woe on the club. Their Brazilian striker, Robinho, was last week questioned over an alleged sexual assault in a Leeds nightclub and it is believed two more players will speak with police over their recollections of the night. Sources suggest they will not be questioned in relation to the offence, but purely as witnesses.
Together with City's doomed pursuit of Kaka, Hughes is unlikely to have faced a more trying time in his managerial career. The former Blackburn manager insists he is happy with the result of his endeavours to spend the club's new-found billions in the January transfer window.
On Thursday Shay Given will be unveiled by the club, joining Nigel De Jong, Wayne Bridge and Craig Bellamy as the results of Hughes's £51 million spree.
But Hughes clearly feels that Blackburn are being disingenuous by insisting that striker Roque Santa Cruz, his primary target since taking charge at Eastlands, would have been sold only had they found a replacement.
He told the club's website: "If we had offered more money to a certain level it would have been done, which would have negated their argument to a certain extent, but we were not going to do that. We said all along that we had values for players and that we were not going above them."
In the dock
Manchester City were dealt another blow on Wednesday with the news that Shaun Wright-Phillips faces a Football Association charge of violent conduct for appearing to lash out at Rory Delap in Saturday's 1-0 defeat at the Britannia Stadium.
Delap was sent off for first fouling and then kicking the ball at the player as he lay on the ground, but referee Martin Atkinson missed the winger's reaction, when he seemed to kick the midfielder as he returned to his feet.
Atkinson has told Soho Square that, having watched footage of the incident, he would have sent Wright-Phillips off had he seen the kick.