The 51-year-old was held by police at Durham railway station following allegations a woman was touched inappropriately on a CrossCountry service from York.
Gascoigne, from Gateshead, has been released while officers continue to investigate the incident on Monday evening.
The ex-Newcastle, Tottenham and Rangers star, who has had a well-publicised battle with alcohol addiction, recently denied he was drunk during an appearance on Sky’s Soccer AM.
The star, known as “Gazza”, explained he cut his appearance on the programme short due to the effect of sleeping tablets.
He has since revealed the anguish caused by the death of his nephew Jay Kerrigan, 22, following an overdose.
Gascoigne, who played 57 times for the national side, told the Daily Star Sunday how Jay’s mother Anna, the former footballer’s sister, tried to get help for her son.
Ahead of an inquest into Jay’s death next month, he said: “I was with Anna when the services let Jay down and he accidentally overdosed and passed away.
“It hurts to lose my nephew… I lost him and ended up in rehab. I want to support anyone that is suffering like my nephew did.
“I’m hoping to save other people’s lives as I’ve lost my nephew, who said to me, ‘Uncle Paul they won’t help me’. What did he have to do to get help?”
Gascoigne added: “My sister, who I love so much, tried to get the mental health people to help him. He was in need of help, but they said he was not appropriate to receive any.”