Michaella McCollum Connolly, 20, from Belfast, was arrested in Lima on Tuesday along with Melissa Reid, 19, from Scotland, while trying to board a flight to Madrid.
The National Police of Peru said they found more than 24lb of cocaine – thought to be worth around £1.5m (1.7m euro) – hidden in food in the luggage of the two women.
They were stopped at the international airport’s Air Europa counter.
Ms McCollum Connolly was at the centre of a Facebook and online social media appeal, backed by Irish sports stars, desperately seeking information about her whereabouts over the past two weeks.
Her distraught family said they had not heard anything from her in 12 days.
Diplomats have confirmed they are helping an Irish woman and a British woman arrested in Peru over alleged drug trafficking offences. The Foreign Office in London confirmed it was helping a British national.
“We are aware of the arrest of a British national in Peru this week and are providing consular assistance,” a spokeswoman said.
Ireland’s Department of Foreign Affairs said it was also providing consular assistance to the family of an Irish woman being held in Peru on suspicion of drug trafficking offences.
Ms McCollum Connolly holds an Irish passport.
The photography student had gone to San Antonio in Ibiza in June on a working holiday.
She was looking for work as a dancer and nightclub hostess.
Her family said she usually phoned home every two to three days and they became concerned when she had fallen out of contact.
Ms McCollum Connolly and Ms Reid were detained at the Jorge Chavez International airport as they tried to board a flight to Madrid, which was travelling on to Palma, Mallorca, police in Peru said.
Ms Reid’s family is reported to be in shock after learning about her arrest.