Police detained the man on Saturday in front of the alleged victim's house in the Stubaital valley, a spokesman for prosecutors in Innsbruck confirmed.
The soldier reportedly broke into the family home during the night and was discovered half-naked in the child’s bedroom by her father, who called the police.
The suspect has been placed in investigative custody for at least two weeks.
"We have started an investigation into suspicions of aggravated sexual abuse," Prosecutor Hansjörg Mayr said, adding authorities had informed the British consulate about the case.
The Heute newspaper reported that the incident took place while British soldiers from the elite 7th Parachute Regiment Royal Horse Artillery were in Tyrol for mountain training.
"We can confirm the arrest of a British national in Neustift," an embassy spokesman said.
A spokesman for the British army said they were aware of the arrest and detention of a soldier on November 29th.
"This is a matter for the Austrian authorities and it would be inappropriate for us to comment further," he said.