Journalist Jamal Khashoggi died after a fight in the Saudi consulate in Istanbul, the country’s state TV reported quoting an initial probe.
It said deputy intelligence chief Ahmad al-Assiri and Saud al-Qahtani, senior aide to Crown Prince Mohammed Bin Salman, were dismissed over the affair.
US President Donald Trump said what happened was “unacceptable” but Saudi Arabia was a “great ally”.
This is the first time the kingdom has admitted Mr Khashoggi has died.
Speaking at a round table event, President Trump said the arrests were an important “first step”. He praised the kingdom for acting quickly, and while he said sanctions were an option against the country, he spoke of the possible effect such moves would have on the US economy.
Asked if he found Saudi Arabia’s version of events credible, he replied, “I do.”
Saudi King Salman has also reportedly ordered the formation of a ministerial committee, headed by Crown Prince Mohammed, to restructure the intelligence services.
The journalist was last seen entering the Saudi consulate in Istanbul on 2 October, to pick up paperwork that would allow him to marry his fiancée Hatice Cengiz.
Saudi Arabia reportedly acted on information provided by Turkish authorities as part of its inquiry, investigating a number of suspects.
Earlier police in Turkey expanded their search for Mr Khashoggi’s body, with unnamed officials saying his body may have been disposed of in the nearby Belgrad forest or on farmland.
What are Saudi officials saying?
A statement from Saudi Arabia’s public prosecutor said a fight broke out between Mr Khashoggi and people who met him in the consulate – ending with his death.
The investigations are still under way, it said, and 18 Saudi nationals have been arrested.
Media reports also spoke of the dismissal of the two senior officials.
Saud al-Qahtani is a prominent member of the Saudi Royal Court and adviser to Prince Mohammed bin Salman.
Major-General Ahmed al-Assiri has acted as the top spokesman for the kingdom about the war in Yemen.
What’s been the reaction?
A White House statement acknowledged the Saudi investigation shortly after the announcement.
It said the US was “deeply saddened” to hear confirmation of Mr Khashoggi’s death.
President Trump stressed the importance of Saudi Arabia as a counterbalance to Iran in the Middle East, and pushed back against the need for sanctions against the country in light of the new information, talking about the effect of such a move on the US economy.
He spoke of his visit to Saudi Arabia – his first trip abroad as president – and the $110bn (£84bn) arms deal he signed with the kingdom.
“I’d rather keep the million jobs [in the US] and find another solution,” he said.
