According to judicial officials on Tuesday, Jean-Bernard Merimee is suspected of having received kickbacks in the form of oil allocations from the government of Iraqi dictator Saddam Hussein.
He was also a special adviser to UN Secretary-General Kofi Annan from 1999 to 2002.
Merimee was taken into custody on Monday, and is expected to be presented on Wednesday to the judge leading the probe.
The 68-year former diplomat was France's permanent representative to the UN from 1991 to 1995. He was one of the world body's most prominent officials, in part because France occupies one of five permanent seats on the UN Security Council.
The oil-for-food programme was established in 1996 to provide food, medical supplies and other humanitarian goods for millions of Iraqis trying to cope with UN sanctions imposed after Iraq's 1990 invasion of Kuwait.
The programme ended with the US invasion of Iraq in 2003.
Merimee helped to create a system by which the European Commission disbursed payments to the United Nations.
Annan spokesman Stephane Dujarric said the UN would not comment on the specifics of the case.
"We have made it clear that we support the efforts of national authorities who wish to pursue proceedings into activities of their own nationals who may or may not have been involved in the oil-for-food programme," Dujarric said.
The French mission to the United Nations promised to cooperate with the investigation into Merimee.
A spokesman said the mission's papers from Merimee's time at the UN had long since been sent back to the national archives in Paris and that there had been no request so far to meet staff in New York.
Hussein manipulated the oil-for-food programme under a scheme by which he essentially sold oil at a reduced rate to favoured buyers, who could then turn around and sell the oil at a hefty profit.
Ten French officials and business leaders - including a former adviser to former interior minister Charles Pasqua - are suspected of having received oil allocations as kickbacks from the former Iraqi government.