German prosecutors said that the apartment and workplace of the man, identified only as David S., had been searched and he would be brought before an investigating judge later on Wednesday.
British police said the man was 57.
“On at least one occasion, he passed on documents he had obtained in the course of his professional activities to a representative of a Russian intelligence service,” Germany’s chief federal prosecutor’s office said in a statement.
“The accused received cash in an as yet unknown amount in return for his transmission of information,” it added.
Russia’s Federal Security Service (FSB) and Foreign Intelligence Service (SVR) did not immediately reply to requests for comment. The Russian Embassy in Germany declined to comment on reports about the case to the Interfax news agency.
The British embassy in Berlin is just around the corner from the iconic Brandenburg Gate and a short, 250-metre (273 yard) walk from the Russian embassy, which is on the famous Unter den Linden boulevard.
In May, Britain set out plans to crack down on hostile activity by foreign states, introducing a proposed law to give security services and law enforcement new powers to tackle growing threats.
The man was arrested on Tuesday in Potsdam, just outside Berlin. He was employed as a local staff member at the embassy until his arrest, which was the result of a joint investigation by German and British authorities, the prosecutors said.
British police said in a statement that the man was arrested on suspicion of committing offences relating to being engaged in “Intelligence Agent activity”.
British spy chiefs say both China and Russia have sought to steal commercially sensitive data and intellectual property as well as to interfere in politics, while Russian agents are also accused of carrying out an attack on former Russian spy Sergei Skripal on British soil in 2018.
Beijing and Moscow say the West is gripped with a paranoia about plots. Both Russia and China deny they meddle abroad, seek to steal technology, carry out cyberattacks or sow discord.
The Berlin case has echoes of the shadowy world of espionage practised during the Cold War, when double agent Kim Philby and others in a ring of British spies known as the “Cambridge Five” passed information to the Soviet Union.
(Reporting by Emma Thomasson and Paul Carrel in Berlin, by Ekaterina Golubkova and Anton Kolodyazhnyy in Moscow, and by Guy Faulconbridge in London; Editing by Kirsti Knolle, Kirsten Donovan)