The 26-year-old Portuguese international is said to have been held at sprawling disco La Riviera and taken to a local police station for questioning at around 5.30am on September 8.
Spanish newspaper El Mundo said he was accused of taking the phone from a 58-year-old man who had tried to take a photo of him without permission in the nightclub toilets.
Brazilian-born Nunes is said to have snatched the mobile in a fit of anger and refused to return it.
Police made the arrest after being called to the club and confirming the footballer still had the phone in his possession, El Mundo reports.
The former Wolves player was reportedly handcuffed at the nightspot before being taken to a National Police station in the Madrid neighbourhood of Arganzuela.
He was released hours later following the intervention of a lawyer.
El Mundo reported he is expected to face charges and trial over the incident.
A spokesman for the National Police in Madrid said: ‘I can confirm a Portuguese national was arrested in the early hours of September 8 at a Madrid nightclub on suspicion of stealing another person’s mobile phone.’
The police force confirmed the man arrested was born in 1998, the same year Man City midfielder Matheus Nunes was born, but said it was unable to comment on whether the suspect was the footballer.
A well-placed source said: ‘This matter will now be resolved by way of a trial in court.’
Metro has contacted Manchester City for comment.
Nunes was reportedly in Madrid during the international break after not being selected by Portugal.
He came off the bench for Man City in their first game back after the hiatus, featuring in the final minutes of their 2-1 win against Brentford.
Nunes was an unused sub in City’s last two Premier League games, against Arsenal and Newcastle, but played the full 90 minutes in their Champions League win against Slovan Bratislava on Tuesday.
Nunes signed for City from Wolves last year in a £53million transfer.
He has played 35 times for Pep Guardiola’s side, scoring one goal and adding six assists.
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