The site's founders have been charged with violating piracy laws.
Federal prosecutors have accused it of costing copyright holders more than $500m (£320m) in lost revenue. The firm says it was diligent in responding to complaints about pirated material.
In response, the hackers group Anonymous has targeted the FBI and US Department of Justice websites.
The news came a day after anti-piracy law protests, but investigators said they were ordered two weeks ago.
The US Justice Department said that Megaupload's two co-founders Kim Dotcom, formerly known as Kim Schmitz, and Mathias Ortmann were arrested in Auckland, New Zealand along with two other employees of the business at the request of US officials. It added that three other defendants were still at large.
"This action is among the largest criminal copyright cases ever brought by the United States and directly targets the misuse of a public content storage and distribution site to commit and facilitate intellectual property crime,"
said a statement posted on its website.
The FBI website was intermittently unavailable on Thursday evening due to what officials said was being "treated as a malicious act".
The hackers' group Anonymous said it was carrying out the attacks.
The Motion Picture Association of America's website also suffered disruption.
Third-party sites
The charges included, conspiracies to commit racketeering, copyright infringement and money laundering.
A federal court in Virginia ordered that 18 domain names associated with the Hong Kong-based firm be seized.
The Justice Department said that more than 20 search warrants had been executed in nine countries, and that approximately $50m (£32m) in assets had been seized.
It claimed that the accused had pursued a business model designed to promote the uploading of copyrighted works.
"The conspirators allegedly paid users whom they specifically knew uploaded infringing content and publicised their links to users throughout the world," a statement said.
"By actively supporting the use of third-party linking sites to publicise infringing content, the conspirators did not need to publicise such content on the Megaupload site.
"Instead, the indictment alleges that the conspirators manipulated the perception of content available on their servers by not providing a public search function on the Megaupload site and by not including popular infringing content on the publicly available lists of top content downloaded by its users."
Before it was shut down the site posted a statement saying the allegations against it were "grotesquely overblown".
"The fact is that the vast majority of Mega's internet traffic is legitimate, and we are here to stay," it added.
"If the content industry would like to take advantage of our popularity, we are happy to enter into a dialogue. We have some good ideas. Please get in touch."
Blackouts The announcement came a day after thousands of websites took part in a "blackout" to protest against the Stop Online Piracy Act (Sopa) and the Protect Intellectual Property Act (Pipa).
The US Chamber of Commerce has defended the proposed laws saying that enforcement agencies "lack the tools" to effectively apply existing intellectual property laws to the digital world.
Industry watchers suggest this latest move may feed into the wider debate.
"Neither of the bills are close to being passed - they need further revision. But it appears that officials are able to use existing tools to go after a business alleged to be inducing piracy," said Gartner's media distribution expert Mike McGuire.
"It begs the question that if you can find and arrest people who are suspected to be involved in piracy using existing laws, then why introduce further regulations which are US-only and potentially damaging?"
