To calculate fault currents in distribution systems accurately, the fault model must include the electrical arc existing at the fault point, which plays an important role in the fault currents calculation. In existing approaches, the value of the arc resistance at the fault location must be known in advance. Since the fault current depends on the arc resistance, which itself is a nonlinear function of the fault current, the key question here is how to calculate the arc resistance and the fault current at the fault location consecutively and accurately. In this paper, a new solution for the aforementioned defined problem using an iterative procedure is proposed and validated. The solution is based on an improved method for calculating short-circuit currents in distribution networks, in which the iterative hybrid compensation short-circuit method and a new formula for arc resistance are used. A significant achievement is that the improved method calculates short-circuit currents and arc resistance consecutively, improving the accuracy of the computation. The results of fault analysis and arc resistance calculation in the IEEE-34 distribution network with/without a distributed generator are presented and discussed. The practical importance of the improved method is addressed as well.