Aubrey Sacco, 23, went missing in April 2010 while hiking alone in the Langtang National Park about 35 kilometres north of Kathmandu.
Police said they arrested two men on Friday, which led to the arrest of three others suspected of involvement in the case.
They said one of the men confessed that they had murdered Sacco while she was trekking, had taken her camera and clothes and thrown the body and her passport into a river.
Sacco's parents traveled to Nepal several times over the last three years, trying to pressure police to investigate.