The terrifying incident happened at a house outside the Co Louth town yesterday afternoon and led the occupants to flee the property.
Sources say that the officers from Dundalk managed to "subdue" the suspect and then brought him to Tallaght garda station, where he was being questioned last night about the murder of Ademola Giwa.
Gardaí believe that a "simmering" ongoing local row was the motive behind Tuesday night's fatal stab attack in Tallaght.
Mr Giwa (25) suffered fatal injuries to his neck when he was stabbed at Mac Uilliam Road, close to his home, at 7.15pm on Tuesday.
Tributes have been paid to Mr Giwa, who had lived in the community for most of his life in nearby Mac Uilliam Parade with his family.
The chief suspect is a Tallaght-based man aged in his 20s and is known to gardaí.
Gardaí quickly established that the knife attack was linked to a "violent row" in the area earlier on Tuesday.
Senior sources said gardaí are not looking for anyone else in relation to the murder and are satisfied that the suspect travelled to Dundalk in the aftermath of it, where he met with associates.
He is also being investigated for the alleged violent incident that happened yesterday in Dundalk before his arrest, a source said.
As well as being questioned about the murder last night, the suspect - who was known to Mr Giwa - is also being quizzed about an assault on a man aged in his 50s during the same incident.
"A second male in his 50s continues to receive medical attention for non-life-threatening injuries sustained during the same incident," a garda spokesman said.
A source told the Herald: "It was a very violent scene and the victim suffered catastrophic blood loss."
A large number of public order units from across the city's southside rushed to the area and detectives at the scene gave CPR to the victim.
He was taken to Tallaght University Hospital where he died shortly after arrival.
Throughout yesterday morning gardaí searched the area for the weapon used in the brutal attack and an area of Mac Uilliam Road was cordoned off for a number of hours. It can be revealed Mr Giwa was being investigated as part of a detailed garda investigation into money laundering and the recruitment of money mules by a locally-based criminal organisation, but he had not yet been questioned by officers as part of this probe.
"Gardaí were looking at recent information they had received in relation to this but investigations were at a very early stage," a senior source said.
His brutal murder has caused huge shock in the Tallaght area.
A former football manager who worked with Mr Giwa described him as an "absolute gentleman" who was "big into his fitness".
Antony Dempsey, who is originally from Tallaght, managed Mr Giwa several years ago when he played for Marks Celtic as a teenager.
He told the Sunday World that he was shocked to learn of the horrific killing involving somebody he knew quite well.
"It's very sad news," he said. "We heard about it last night and then this morning. He had stopped playing football (a few years ago) but we were still in contact on Instagram.
"He was an absolute gentleman, to be honest, and I never heard a bad word (said about him).
"I know a lot of people from the Tallaght area and he wasn't mixed up with any gangs or anything. He was just a really nice guy."