The 44-year-old, who is now Manchester United's head of academy, was held by police following reports on Tuesday that a woman had been assaulted at an address in Hale, Greater Manchester.
Butt, who also previously played for Manchester United and England, was later released pending further inquiries.
A spokeswoman for Greater Manchester Police said: "Police were called at around 2pm on Tuesday 16 April 2019 to reports that a woman had been assaulted at a house on Broadway, Hale.
"The woman received a small cut to her hand and does not require hospital treatment.
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"A 44-year-old was arrested on suspicion of assault and has been bailed pending further inquiries.
"Inquiries are ongoing and anyone with information should contact police on 101 quoting reference number 1086 of 16/04/19 or the independent charity Crimestoppers, anonymously, on 0800 555 111."
Butt won six Premier League titles in his playing career at Old Trafford and also played in the club's dramatic 2-1 victory over Bayern Munich in the 1999 Champions League final.
United were knocked out of this year's Champions League quarter-finals on Tuesday night as Barcelona completed a 4-0 aggregate victory.