Xhaka had been stripped of the Arsenal captaincy under former manager Unai Emery after he angrily gestured at supporters who jeered him at a game in 2019.
However, when Arteta took over mid-season, he revived both the player's fortunes and his relationship with the Arsenal faithful before Xhaka earned a move in 2023 to Bayer Leverkusen where he won the Bundesliga title and German Cup.
"I loved every minute we spent together. When I joined, he was in a special moment of his life and career," Arteta told reporters ahead of Saturday's game at Sunderland.
"Between all of us, we tried to guide him, to give him a different perspective, to make him feel loved and valued, and he responded in an incredible way."
Arteta 'eternally grateful' to Xhaka
"He made me a better coach. He helped us to develop and improve a lot as a team and a club," Arteta added. "I will be eternally grateful because I have great memories with him."
Despite the midfielder's rocky relationship with supporters, Arteta insisted the club always valued Xhaka internally, describing him as a transformative dressing-room presence.
"I am laughing because I just visualised Granit and it makes me laugh because he was such a character, a huge personality, very funny, super professional," Arteta added.
"One of those guys who can change the spirit of a dressing room and a team. That's a superpower to have.
"It wasn't an easy decision (to let him leave) because I knew the impact he could still have. But then when you have one of those leaders, you need to have him in the right frame of mind, feeling committed."
Xhaka's instant impact at Sunderland
Xhaka returned to the Premier League this season when Sunderland signed him for an initial fee of 13 million pounds ($17.45 million) as Regis Le Bris sought to bring in a leader who could guide the youngsters and players new to the league in the promoted team.
The 33-year-old has duly delivered with a goal and three assists while creating several chances for his teammates as Sunderland sit fourth in the standings, level on 18 points with third-placed Liverpool and seven off leaders Arsenal.
"With the impact he is having, one of the best (signings of the season), I would say," Arteta said.
"I think what they (Sunderland) have done as a football club in the last few years is very impressive, how stable they look and how they have started the season. Really impressed."
With Gabriel Jesus back in training, Arteta said it was a matter of time before the Brazilian forward is ready to play but he did not comment on when Kai Havertz, Martin Odegaard, Viktor Gyokeres, Noni Madueke and Gabriel Martinelli would return.
