Csatary, who has been convicted in absentia and sentenced to death, was picked up early today, Bettina Bagoly, spokeswoman for the Budapest prosecutor, told ABC News.
The elderly former Nazi "was accused with committing war crimes," according to a statement released by the prosecutor's office.
Csatary will be taken before an investigative judge later today and the "prosecution office will initiate the house arrest," the statement said.
Bagoly said the prosecutor's office is still investigating allegations against Csatary, and the office statement indicated that the probe began in September 2011 at the instigation of the Simon Wiesenthal Center in Israel which specializes in hunting Nazi war criminals.
The prosecutor's statement said they were warned by the Wiesenthal Center that Csatary "will leave the country as soon as he realizes that there is ongoing investigation in the case."
The prosecutors said the investigation is complicated by the age of the crime and that it was committed in Slovakia, witnesses are in Israel, some of the legal papers are in Canada and the suspect is in Hungary.
Csatary has lived openly under his own name in Budapest in recent years. When the accusation against him became public this week and police visited his two homes in Budapest, Csatary was not there.
Csatary, the former police chief of a camp in the Slovakian city of Kosice, then part of Hungary, was described as a "particularly sadistic" Nazi official.
The court document released today states that he was a police trainee who was elevated to police chief in a concentration camp located in a brick factory in 1944. "In that position, [Csatary] regularly whipped the deported Jews with a dogs' whip without any special reasons and irrespective of the assaulted people's sex, age or health condition."
Almost 12,000 Jews held at the brick factory were sent to Auschwitz crammed into freight wagons, the indictment states, noting that on June 2, 1944 Csatary refused to allow the Jews to cut windows into the jammed trains in order to get more air.
Peter Feldmajer, the president of the Jewish community in Hungary, told ABC News that Csatary was notorious.
"He created a camp for torturing the rich so they would confess where they have hidden the money," Feldmajer said.
Laszlo Karsai, Hungary's top holocaust historian whose grandmother died in Auschwitz, agreed that Csatary was "very sadistic."
"There are two testimonies of German officers in Kosice who had to stop him from torturing Jewish women. He made women dig holes in the ground with their bare hands," Karsai told ABC News.
"But what do you do with a 97-year-old man who was very, very sadistic 68 years ago?" Karsai asked.
Csatary has been convicted in absentia and sentenced to death for war crimes in Czechoslovakia in 1948.
He arrived in Nova Scotia as a refugee under the false name, became a Canadian citizen in 1955 and worked as an art dealer in Montreal. In 1995 the authorities discovered his real name and revoked his citizenship. Before fleeing Canada, he admitted to Canadian investigators of his participation in the deportation of the Jews, but claimed that his role was "limited."
Last year, a Hungarian court acquitted another of the Wiesenthal Center's most-wanted, Sandor Kepiro, who was accused of helping organize the mass murder of about 3,000 civilians in the Serbian city of Novi Sad in 1942. Prosecutors appealed the verdict, but Kepiro died in the meantime.
The case comes at a sensitive time for Hungary, which has seen a rise in anti-Semitism in recent months with official attempts to it play down.