Jon Venables, 35, was arrested last week in a top secret police operation.
Officials are believed to have found a stash of indecent material on his home computer during a routine visit early last week and immediately alerted law enforcement.
Chillingly, the raid is thought to include 'sickening' child abuse images similar to those that sparked his recall to jail in 2010.
Just hours later, Venables was taken to a maximum security prison.
He is currently being held there for breaching the terms of the life license handed to him and accomplice Robert Thompson after the abduction, torture and murder of two-year-old James in Merseyside in 1993.
Venables has not yet been charged with any offence but is now also the subject of a major police investigation.
The 'immediate recall' means Venables has been returned to prison twice in the last decade despite vast sums - an estimated $A8.7million - being spent on his rehabilitation.
After he was freed on parole in 2013, James' distraught father tellingly warned, 'It is only a matter of time before he caves in to his lust for young children again.'
Venables has been living under a secret name in a secret location following his 2013 release.
The convicted paedophile, seen as an ultra-high risk sex-offender, has been constantly monitored by probation officials in recent years.
They are believed to have visited his home early last week and found evidence of the images on an electronic device.
Venables will now be held indefinitely while the new allegations are investigated and a Parole Board assesses him once again.
Now back in prison, Venables is being housed in complete isolation from other inmates for his own safety.
While inside, Venables was also given access to a private rowing machine, allowed to paint his cell and given private guitar lessons to pass the time, all funded by the public purse.
Venables was last recalled to prison in February 2010 when officials found him hoarding child abuse images of children as young as two. He was later charged and convicted of downloading and distributing the photos and given a two-year jail term.
Venables and his friend Thompson, shocked the world when the horrific details emerged of James' murder in 1993.
The pair, then aged 10, snatched the toddler from his mum as she let go of his hand for a few seconds to pay for sausages at a butcher's in a shopping centre in Bootle, Merseyside.
The duo are then believed to have led James away though traffic, and along a canal towpath, before beating him with an iron bar. They then reportedly poured paint into his eyes, stoned him and clubbed him with bricks, before leaving him on the railway line to be sliced in two by a train.
In November 1993, the pair, by then both 11, were found guilty of abducting and murdering James after a trial at Preston Crown Court.
The verdict made them the youngest convicted murderers in Britain for 250 years and they were detained in youth custody indefinitely.
They spent seven years receiving costly treatment and rehabilitation at secure units in the North West before finally being released in 2001.