Armed Police were deployed to the town during the early hours of Sunday morning.
It had been reported to Police that an individual had been spotted in the vicinity of Terminus Road carrying what was thought to be a firearm.
The male suspect was later arrested in the Three Gates Road area, near to Aldi supermarket.
Searches have been taking place in Newport and Gurnard in connection with this incident, with a 36-year-old woman from Newport also being arrested on suspicion of conspiring to possess a firearm. She has been released from custody but remains under investigation.
The 36-year-old man, however, remains in custody on suspicion of being in possession of a firearm without a certificate.
Hampshire Constabulary has confirmed that no one has been harmed.
Anyone who witnessed the incident on Terminus Road or has any information is asked to contact Police on 101, quoting 44210406721.
UPDATE – The 36-year-old man has been released under investigation.
Police say that enquiries continue.