A British Transport Police spokesman said the men were former Network Rail contractors, who had been arrested on suspicion of conspiracy to defraud Network Rail.

He said the arrests came after a 12-month investigation, which involved two lines of inquiry.

Officers were looking into the alleged use of confidential information to assist in the proposed purchase of the site in Holgate Road, where the carriageworks was based until shut down in the mid-1990s.

They were investigating allegations that the site was to be purchased for £8.5 million with the aim of selling it on for £20 million.

The second allegation concerned the awarding of a contract worth about £1 million to a company.

He said the three arrested men were all from York.

All three men had been released on bail and no one had been charged.

He said the investigation was expected to continue for a considerable period.

A spokesman for Network Rail said today: "We are co-operating fully with British Transport Police on this matter. However it would be inappropriate to comment further until the investigation is concluded."

The carriageworks site once employed thousands of rail workers and played a key role in York's once proud wagon building industry.

But since the mid-1990s, its fortunes have changed dramatically.

ABB bosses announced the closure of its factory on the site in January, 1995, following the completion of a deal to produce 465 Networker carriages for commuter trains in Kent.

ABB's 750 workers were told production would wind down and, in August 1996, the last trains rolled off the production line at the Holgate Road plant.

Rail manufacturing later returned to the site with the arrival of US rail giant Thrall Europa, which made wagons there.

But in June 2002, the company announced it was to close with the loss of 260 jobs. Since then, Network Rail has been using the historic location to help keep trains running on time.

The company has established a firm base there to get its national maintenance fleet ready for action.

In May 2005, we reported that 20 of its rail head treatment trains were being maintained at the site in preparation for the autumn season when they were used to help combat the problem of leaves falling on the rail network.

Trains can be delayed for hours at a time because of the seasonal difficulty.

Multi-purpose vehicles are also treated at the former Thrall works, which are used for weed spraying and de-icing on the hundreds of miles of rail track across the UK