The woman, named locally as Rebecca Gannon, 29, was on a diving trip with her boyfriend jetting off from the port city of Saranda to the coast of Corfu, on Monday afternoon.
The qualified diver allegedly got into difficulty underwater with the tour boat instructor diving in to save her.
Diving instructor Saimir Kushova, 45 was reportedly arrested on suspicion of violating health and safety rules and illegally employing a diving instructor who was not fully qualified.
Kushova dived in in an attempt to save Ms Gannon and brought her back to the surface, according to local reports.
An employee at the diving company, Spiranca Diving, told The Telegraph: “We don’t know what happened, maybe she had a health issue.
“We’re waiting for the autopsy. We’re all very shocked. She was a qualified open water diver, she had a PADI certificate.
“She was diving on a shipwreck but was only at a depth of seven or eight metres. She came to the surface but then went down.
“Saimir has been arrested but he was the one who tried to rescue her, he gave her CPR.”
Gerta Brozi, who was with the diver group, said there had been a problem with an oxygen regulator but it was replaced with a working one.
He said: “We don’t really know what happened and we’re waiting for the police to finish the investigation. The British girl who died was together with her boyfriend.
“Both had PADI certificates for open water diving so they were qualified to dive with us. She stood in the water for 10 minutes and then had difficulty.
“The next thing we know is that Saimiri pointed out that she had problems and dived in to save her. He did everything he could to bring her to the surface.”
He told Mail Online: “It was a very traumatic experience and the boyfriend was very upset by it, as was everyone else on the boat.”
A Foreign Office spokesperson said: “We are supporting the family of a British woman who has died in Albania and are in contact with the local authorities.”