Cleo was discovered alone in a room in the house in Carnarvon, some 75 kilometres south from where she went missing, about 1am on Wednesday by WA Police officers.
"One of the officers picked her up into his arms and asked her 'What's your name?'" Deputy Commissioner Col Blanch revealed.
"She said - 'My name is Cleo.'"
A 36-year-old man from Carnarvon is in custody and is being questioned in relation to the suspected abduction.
Police say he has no connection to Cleo's family and was not present at the house when Cleo was found.
The girl has been reunited with her mother Ellie Smith and Ms Smith's partner Jake Gliddon. She is receiving medical care but is said to be in good physical health.
"Our family is whole again," Ms Smith posted on Instagram alongside a photo of Cleo.
Mr Blanch thanked the WA community, volunteers and officers involved in the 18-day search for Cleo.
He described seeing seasoned detectives "openly crying with relief", saying it was the result of some incredible police work.
"We were literally looking for a needle in a haystack and we found it," he told Perth radio 6PR.
"When she said 'my name is Cleo', I don't think there was a dry eye in the house.
"This really did hit the heart of Western Australians, it went international and to see Cleo rescued this morning, I'm speechless."
Talkback radio lines were flooded on Wednesday with callers describing their own emotion at learning the news.
Carnarvon Shire President Eddie Jones said the local community would be "elated, thankful" as they heard the good news.
"It is wonderful," he told 6PR.
Cleo vanished from a tent at the Blowholes campsite, about 950km north of Perth, after the family arrived on October 16.
She was last seen by her mother around 1.30am that night.
The search for Cleo captured national attention, including in NSW where the state's police commissioner on Wednesday recounted a conversation he had with WA counterpart Chris Dawson after Cleo was found.
"He said when he got the call this morning he broke down and cried," Mick Fuller told Sydney radio 2GB.
"It's such an amazing story."
Mr Dawson, who will travel to Carnarvon later on Wednesday, said it was one of the greatest moments in the history of the force.
WA investigators spoke to more than 110 people who were at the campsite when Cleo went missing.
They sifted through more than 1000 calls to Crime Stoppers and trawled through vast amounts of materials for forensic clues.
They had also been searching for the driver of a car seen leaving in the campsite in the middle of the night before it was discovered the child was missing.
WA Police had suspected she was abducted by an "opportunistic" offender. A press conference will be held later on Wednesday.
The state government had offered a $1 million reward for information to find Cleo.
Prime Minister Scott Morrison said Cleo's discovery was "wonderful, relieving news".
"Thank you to the many police officers involved in finding Cleo and supporting her family," he posted on Twitter.
