Former Nepali Prime Minister Sher Bahadur Deuba was arrested in the early hours of Wednesday morning at his home in the capital Kathmandu.
The arrest took place a week after Mr. Deuba refused to appear before an anti-corruption commission to answer charges of graft in awarding contracts for a drinking water project while he was in power.
The Royal Commission for Corruption Control was established by King Gyanendra after he sacked Mr. Deuba on February 1 and took direct control of the administration.
The panel has sweeping powers of detention and punishment, but Mr. Deuba says it is unconstitutional and illegal.
Mr. Deuba also claims corruption allegations are aimed at slandering political leaders who oppose King Gyanendra's seizure of power.
Yuvraj Ghimre, editor of Samay magazine in Kathmandu says people are stunned at the way security forces stormed the former prime minister's home at night, disconnecting phone and electricity lines before taking him into custody.
"It has generated a sense of frustration, anger and shock….Nobody is condoning corruption, but certainly the government manner … they were trying to do everything in the veil of darkness, that in itself is quite unlawful and goes against the norms of a state that honors the rule of law," said Yuvraj Ghimre.
Mr. Deuba's arrest comes just days before emergency measures imposed by King Gyanendra are due to end.
Mr. Deuba was placed under house arrest shortly after he was sacked, but was released last month.
Civil liberties have been suspended in Nepal since the King took power, and thousands of political and human rights activists and journalists have been detained.
Under pressure from the international community the King has promised he will restore democracy "sooner rather than later", but political observers say they see no signs of the monarch giving up his hold on power.