The emergency caused dozens of domestic flight cancellations and delays at Australia's busiest airport.
Malaysia Airlines flight MH122 left Sydney Airport with 199 passengers and 12 crew aboard on an eight-hour flight to Kuala Lumpur and returned more than three hours later because of a "disruptive passenger," the airline said.
"In the interest of safety, the commander of the flight made a decision to return to Sydney," Malaysia's national carrier said in a statement.
Nine News reported that a passenger holding a backpack on the Airbus A330 had threatened to "blow the plane up." Crew checked the backpack and found no explosives, it said.
Australian Federal Police described the situation as an "emergency incident."
A 45-year-old man was arrested without incident and the rest of the passengers were released from the plane about three hours after it landed, a police statement said.
The man, who was not identified, was expected to be charged later Monday, police said. They did not specify an offense.
The airline said passengers would be transferred to the next available flights.
"Malaysia Airlines wishes to thank the authorities for their immediate response and to passengers for remaining calm and cooperative during the ordeal," the airline said.
Sydney Airport said some flights continued to land and take off while emergency agencies responded to the situation. No international flights were canceled.