Mari Alkatiri resigned last month after weeks of violence, which ended only when foreign troops, led by Australia, intervened.
The attorney-general of East Timor, Longuinhos Monteiro, questioned Alkatari in Dili on Thursday and spoke to reporters afterwards.
"His status is a city detainee and he cannot leave the city for 15 days," Monteiro said. "If he wants to leave the city then he must ask permission of the attorney-general."
He said that Alkatiri's legal status was as a suspect in the case, which has already implicated Rogerio Lobato, the former interior minister.
Prosecutors questioned Alkatiri for two hours at Monteiro's office in the capital. Australian commandos and armoured vehicles surrounded the building to prevent any violence by his supporters.
Monteiro said he would summon more witnesses to strengthen the case against Alkatiri, including Jose Ramos-Horta, who was recently appointed prime minister.
East Timor's latest troubles started nearly three months ago when Alkatiri dismissed about 600 soldiers, mostly from the country's west, after they protested against discrimination.
Ramos-Horta, previously the foreign minister and a Nobel laureate, has promised to restore security and confidence to East Timor before general elections due next year.
Australia led a multi-national force in 1999 after a vote for independence marked by violence blamed largely on pro-Jakarta militia with ties to the Indonesian army.
East Timor became a fully fledged nation in 2002 after a transitional period of UN administration, but it remains one of the world's poorest countries and has massive unemployment.
However, energy resources that are now being developed should improve its lot in years to come.