Chief Inspector Tony Kuramba said Bizimungu was arrested on Friday following a police raid on his home in which documents were seized indicating that the former president was conducting illegal political activities.
Bizimungu (51), a Hutu, was the first president of Rwanda's government of national unity that was formed after the 1994 genocide in Rwanda in which more than 500 000 minority Tutsis and politically moderate Hutus were killed.
The 100-day slaughter, which was organised by the then Hutu-extremist government, ended when Tutsi-dominated rebels, known as the Rwandan Patriotic Front, captured Kigali in July 1994.
Bizimungu resigned as president in March 2000 after disputes over the prosecution of ministers accused of corruption and mismanagement.
Former rebel leader, Paul Kagame, a Tutsi, took over as president.
Last May, Bizimungu was prevented from launching an opposition party and was forced to leave the presidential palace where he had continued to live after resigning.
Political campaigning banned
Political parties are allowed to exist, but political campaigning is banned as part of a 1994 agreement designed to reconcile the nation after the genocide.
"We have been watching him for sometime and noticed that he ignored government advise that he should not engage in party politics," Kuramba said.
"He did not heed the advise and began to spread rumours and anti-government propaganda causing discontent, divisions and fear in the population."
Bizimungu's arrest comes less than two weeks after Kagame publicly warned the former president that the government's patience "is not infinite" and he should refrain from party politics which is banned under the current transitional constitution.
Police also arrested Charles Ntakiruntinka, secretary-general of Bizimungu's unregistered Democratic Party for Renewal, on Saturday after documents were seized from his home during a police raid, Kuramba said.
"Bizimungu and his colleague are still in our hands, helping us with investigations," Kuramba said. "Next week, they will be in the hands of the prosecution who will take on from there."
If convicted, Bizimungu and Ntakiruntinka could face up to 10 years in jail or a fine of up to 100 000 francs (R2 500), or both, Kuramba said.
A government appointed commission is supposed to draft a new constitution ahead of presidential elections that have been tentatively scheduled for 2003. - Sapa-AP