The schoolgirl's body has never been found after she disappeared in 1994.
Two years after she went missing, police dug up parts of her sister's house and garden looking for the body.
The inquest was told that that the information that led to the search was based on an overheard conversation.
It came from an unnamed source who Brian McVicker, the senior investigating officer at the time, described as sincere.
Mr McVicker told the inquest in Belfast that, in his opinion, the source was a "genuine person trying to help the police at a time when it didn't happen in that area".
Arlene, from Castlederg, was 15 years old when she disappeared after a night out in County Donegal in the Republic of Ireland.
Convicted child killer Robert Howard, who died in prison last year, was the main suspect in her disappearance.
Nothing was found in the search of Kathleen Arkinson's home in 1996.
Counsel for the Arkinson family said to Mr McVicker: "You could be honest as the day is long but reciting something you overheard other people say doesn't vouch for credibility."
Mr McVicker said that with hindsight he still believed "it was the right course of action".
Asked why that was the case, he said: "To ascertain if the information was correct; to remove any cloud of suspicion from the Arkinson family; and to put the spotlight back on Robert Howard as the main suspect."
The inquest heard that Mr McVicker met the source, whom he did not know, and a conduit from whom the information was passed to the police.
The conduit, who has not been named, was described by the retired police officer as a "person held in high esteem in that area".
Another witness who gave evidence to the inquest on Thursday was retired police detective Arnold McAllister, who interviewed Howard.
He said he could not remember the outcome of a complaint to the Police Ombudsman for Northern Ireland regarding the police investigation into Arlene's disappearance, in spite of having been interviewed by the ombudsman's office.
The then ombudsman, Nuala O'Loan, upheld the complaint, finding that police had not acted properly or expeditiously to arrest Howard.
The ombudsman found there were grounds to arrest Howard 48 hours after Arlene went missing.
Mr McVicker said he had been involved in a large amount of terrorist-related work at the time and was asked if the investigation into Arlene's disappearance was "a bit of a nuisance to you".
"Definitely not," he said.
He said he could not remember why it took 46 days to arrest Howard.
He accepted the delay in arresting Howard was because police had no evidence against him.
A decision to extensively search the home of the sister of missing County Tyrone girl Arlene Arkinson was prompted by hearsay, an inquest into the teenager's death has heard.