The official is accused of seeking out unwanted babies in poor, rural areas, obtaining adoption papers and selling the infants, all aged between one and two years, on to foreigners for up to $5 000 each, according to Radio Free Asia.
He has been taken in for questioning and the adoption process for children thought to be caught up in the scam has been suspended pending the results of the investigation, RFA reported.
Mike Pryor, press officer at the US Embassy in Laos, said Laos "suspended foreign adoptions on January 9" but did not offer any specific reason for the move.
"Adopting a child for sale... is a crime related to human trafficking, no question about it," a government official told RFA.
The justice ministry is probing how the scam worked, including whether the birth parents sold their infants, which can constitute a human trafficking offence punishable by a three-to-five-year jail term, the official said.
Familiar with employees
It was not clear how many children were involved in the alleged adoption ring.
The retired official was "familiar" with most of the justice ministry's employees and had often applied for adoption and naturalisation papers, the report said.
Laos is listed as Tier 2 - out of three - in the US State Department's 2011 anti-human trafficking report, which praises the government's "significant efforts" to combat the problem.
The US however said the government had "never administratively or criminally punished any public official for complicity in trafficking in persons".
It said endemic corruption, a weak and ineffective judiciary and a failure to investigate or prosecute local-level officials suspected of involvement in trafficking were also key problems.
The Lao National Assembly approved a National Plan of Action on human trafficking in 2007 but it has not been endorsed by the prime minister's office, the state department report adds.