Thames Valley Police said officers were called to reports of an argument in the Springfield area of the town at around 6.40pm on Saturday.
A 17-year-old boy was taken to hospital after suffering wounds to his chest but died from his injuries.
His next of kin have been informed and are being supported by specialist officers.
The 16-year-old, from Milton Keynes, was arrested on suspicion of murder and remains in custody.
A large police presence remains in the area which is likely to stay for some time while the investigation continues and officers conduct door-to-door enquiries.
Deputy local area commander for Milton Keynes Chief Inspector Kelly Gardner said: “First and foremost, our thoughts are with the family and friends of the boy who has lost his life.
“There will be an increased police presence in the area while enquiries are carried out as part of a thorough investigation. This will include our neighbourhood police officers, who will be in the area all week.”
Senior investigating officer Detective Chief Inspector Stuart Blaik, of the major crime unit, said: “We are currently working to establish the circumstances of this incident in which a boy has tragically died.
“I would encourage anyone who has information about what may have happened to please come forward as well as those who may have been in this area between 6.25pm and 6.50pm.
“I would appeal for drivers to check dash-cam footage in case it may have captured something that could assist with our investigation.”