Sharif's brother, Shahbaz, who is a senior member of the PML-N, was also thought to have been placed under house arrest.
Scuffles broke out in Lahore shortly after Sharif's detention was declared, with riot police firing tear gas at stone-throwing demonstrators.
Sharif, a former prime minister, had vowed to join an anti-government "long march" by lawyers and opposition activists pushing for the restoration of judges deposed by Pervez Musharraf, the former president.
Lawyers and opposition party supporters had planned to gather near Lahore's main court complex before heading towards the capital, Islamabad, to stage a mass protest in front of parliament.
Several thousand demonstrators pushed through police barricades erected on major roads to reach the court before the clashes broke out.
The judges, including Iftikar Chaudhry, the chief justice, have yet to be reinstated under Ali Asif Zardari, the current president.
"After intense political negotiations to try to bring this crisis to an end, it looks like the government has taken the final option of house arrest," Al Jazeera's Imran Khan reported from Lahore.
"On Saturday, Nawaz Sharif addressed a rally in Model Town. Basically, that rally was a fiery speech telling people to go out into the streets, to sit in. That seems to have angered the government and led to the house arrest."
Ahsan Iqbal, information secretary for the PML-N, condemned the house arrest order and denied that Sharif was a destabilising influence in Pakistan.
"Mr Nawaz Sharif ... has categorically stated that if Mr Zardari restores the judges, he can enjoy uninterrupted government for four years," he told Al Jazeera.
"We are not demanding an overthrow of the government, nor are we asking for mid-term elections. All we are asking is for Mr Zardari to fulfil the promises he made to restore the judges."
Other opposition leaders, including Qazi Hussain Ahmed, leader of the Jamat-e-Islami, a religious party that has supported the lawyers' protest, and Imran Khan, the former cricketer-turned-politician, have also been placed under house arrest.
Party officials said that police had been deployed outside the homes of both leaders in Lahore, but that they had managed to slip out and were on their way to Islamabad.
Ishtiaq Ahmad, a professor of international relations at Islamabad's Qaid-e-Azam university, said that Zardari was resisting reinstating the judges for fear they might revoke his protection from corruption charges.
"The return of Benazir Bhutto [Zardari's late wife] and Zardari to Pakistan took place under a deal with Mushrraf in 2007. As part of the deal all the corruption charges, through a special presidential ordinance called NRO [National Reconciliation Ordinance], were removed, against Zardari especially," he told Al Jazeera.
"The NRO remains, but the fear of the Zardari-led regime is, if they restore chief justice Chaudhry - given his assertive background - the NRO might be revoked and then obviously all those charges will come back to haunt Zardari and other party leaders."
Zardari's government has been keen to stifle the protests, arresting scores of people across the country and prompting outrage among rights activists.
"I think there is an air of madness in the presidency, if I may say so," Asma Jahangir, chairperson of the Pakistan Human Rights Commission, told Al Jazeera.
"The kind of outrageous attacks not only on political leadership but on political workers, and the mishandling of women that we have seen, including in civil society, is just outrageous."
Political tensions have risen in Pakistan in recent weeks, after the supreme court last month banned Sharif and his brother, Shahbaz, from holding elected office.
The government vowed on Saturday to review the court ruling, but PML-N officials dismissed the government's announcement and said that their "long march" would continue.
The US is pressuring Zardari and Sharif to reach a settlement, fearing that the government, bogged down in power struggles, will resist Western demands for more help with the war effort in neighbouring Afghanistan.