Television showed images of plainclothes police officers leading Akis Tsohatzopoulos away from his luxurious neo-classical mansion at the foot of the Athens Acropolis. His purchase of the mansion prompted the investigation.
Greek authorities have stepped up arrests of tax dodgers and offenders lately, in an attempt to win popular backing for painful austerity measures that form the backbone of the country's EU/IMF bailout.
But the 72-year-old, who last served as minister in 2004, is the only prominent politician to be arrested so far. He has denied any wrongdoing.
Even though corruption and cronyism are endemic in Greece, no politician has been tried or convicted in recent years, fuelling people's frustration with established parties ahead of a general election on 6 May.
Tsohatzopoulos, a former defence minister who has held various portfolios since the 1980s, faces felony charges in relation to property deals and possible tax violations, a court official said on condition of anonymity. If found guilty, he could receive a jail sentence of up to 25 years.
"An arrest warrant was issued after the completion of a preliminary investigation," said an official, quoted by Reuters.
Tsohatzopoulos nearly became prime minister in 1996, when he was narrowly defeated in an internal party vote to become chairman of the then ruling Socialist PASOK party.
Since quitting politics in 2009, he has repeatedly denied any wrongdoing in a string of affairs investigated by prosecutors, including the use of offshore companies to buy his Athens mansion and the sale of German submarines to Greece.
In 2011, PASOK expelled Tsohatzopoulos after lawmakers asked that he be indicted in connection with the submarine procurement deal with German firm Ferrostaal.
Sources quoted by Greek media said that the court had identified cash payments to then-defence minister Tsohatzopoulos from Ferrostaal, allegedly to ensure that it would win a contract for the purchase of four submarines in 2000. The sum he received is estimated at €8 million, deposited in a Swiss bank.
Tsohatzopoulos is accused of using the money to buy several houses in expensive quarters of Athens, including his main home, located under the Acropolis.