The 37-year-old mother was lucid and talking to investigators, police said. She has not been charged.
The woman was found at the property, suffering stab wounds, alongside the bodies of the eight children.
They were aged 18 months to 15 years. Police have not said how they died. The eighth child was her niece.
Confirming the arrest, Cairns Detective Inspector Bruno Asnicar said: “The 37-year-old mother of several of the children involved in this incident has been arrested for murder overnight and is currently under police guard at the Cairns Base Hospital.”
“At this stage we’re not looking for anybody else – we’re comfortable that the community at large is safe,” he added.
A coroner is due to conduct autopsies on the children to determine the cause of death.
Police found a number of weapons at the scene which are being examined as part of investigations.
The woman’s name has not been released. Her age was first given as 34 but has since been corrected to 37.
A candlelight vigil and church service was held on Friday evening for the children.
Australia’s PM Tony Abbott said in a statement it was an “unspeakable crime”.
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