The alleged sexual assault reportedly took place hours after he had performed at a concert near Auburn, less than 20 miles south of Seattle in Washington State.
The singer was detained early on Saturday morning in the bus at a Walmart in Auburn.
He was placed in jail and then released from custody several hours later but remained under investigation.
Nelly, whose real name is Cornell Iral Haynes Jr, was scheduled to perform in Ridgefield, Washington, on Saturday night.
Scott Rosenblum, the lawyer for the Grammy award-winning artist, said the allegation was false and motivated by “greed and vindictiveness”.
Nelly, who denies the allegation, is known for his hits Hot in Herre, My Place and Over And Over. He also appeared in the 2005 film, The Longest Yard.