The accused, Rajesh, allegedly fired three bullets at Khagembam Santosh, 25, from a close range in Thoubal district at Nongpok Sekmai.
Manipur Chief Minister N Biren Singh has sought a report on the incident.
Director General of Police LM Khaute said the police driver was arrested and a case was registered against him.
"His service revolver suspected to be the murder weapon is confiscated for forensic examination," he said.
According to police, there was a community dance at Nongpok Sekmai where policemen had gone to ensure that there is no law and order problem.
"It appears that Rajesh and Santosh had exchanged hot words for unknown reasons resulting in the fatal shooting," a police official said.
Meanwhile, people from Salungpham -- the slain teacher's village -- on Tuesday raided the house of the accused.
They later put the house on fire. Police and fire tenders could do nothing to restrain the angry mob, an official said.