Security forces arrested Khaleda, the country's most recent prime minister, at about 7:30am (0130 GMT) and moved her to a special jail in the capital after the court rejected her bail application.
Hundreds of army-led security forces had surrounded Khaleda's home in the city's army barracks since Sunday midnight and television footage showed a large convoy of security vehicles carrying Khaleda and her son along a largely empty road from the army garrison to the city's old section where the courts are located.
Khaleda was later produced in court under heavy police protection. From there she was moved in a building turned into a special jail, near the parliament building and beside another special jail where another former prime minister, Sheikh Hasina, is now housed.
The arrest of Khaleda and Arafat came after police said they recorded a corruption case against the ex-prime minister, her son and 11 others late on Sunday. The case involved irregularities in a tender for development of the country's main Chittagong port.
It was the first case filed against Khaleda Zia by the Anti-Corruption Commission, which has already brought multiple charges of extortion and corruption against Hasina.
The charges against Khaleda were read out by government lawyers in her presence.
Khaleda's rival Hasina has been in the special jail since she was detained on July 16 for alleged extortion. Her trial has not started.
Khaleda's elder son and political heir Tareque Rahman was detained in March by security forces as part of an anti-corruption drive launched by the army-backed interim government which took charge in January.
More than 170 other senior political figures have also been detained.
Free and fair elections
Free and fair elections
Bangladesh has been under a state of emergency since January, which banned political activity and protests by political parties or any other groups, and also cancelled an election planned for Jan. 22.
Khaleda stepped down in October at the end of her five-year term.
The interim government headed by Fakhruddin Ahmed, former central bank chief, has promised to hold a free and fair election before the end of next year.
The powerful army also seems determined to crush the two parties headed by Khaleda and Hasina. Prior to January, both parties caused widespread unrest, including costly nationwide strikes condemned by businesses, as well as violent street protests.
The two women have been criticised by many of their party leaders as authoritarian and corrupt.