The case of Laszlo Csatary was brought to the attention of Hungarian authorities last year by the Simon Wiesenthal Center, a Jewish organization active in hunting down Nazis who have yet to be brought to justice.
In April, Csatary topped the organization's list of most-wanted Nazi war criminals.
Prosecutors decided to charge Csatary with the "unlawful torture of human beings," a war crime that carries a maximum sentence of life in prison.
Csatary's lawyer, Gabor Horvath B., said his client has been confined to house arrest for up to 30 days due to prosecutors' fears he might try to flee.
Horvath B. said he had appealed the ruling, which also opened the way for authorities to confiscate Csatary's passport.
As he left a Budapest courthouse Wednesday afternoon following the house arrest hearing, Csatary walked slowly down a flight of steps, trying to shield his face from view and leaning on a companion for support.
Tibor Ibolya, Budapest's acting chief prosecutor, said Csatary recounted his Holocaust-era activities to authorities during questioning, saying he was following orders and carrying out his duty.
"The suspect denied having committed the crimes," Ibolya said, adding that during his testimony Csatary's "attitude toward some of his fellow men of a certain religion ... is not what we would consider normal."
According to a summary of the case released by prosecutors, Csatary was a police officer in the Slovakian city of Kosice, at a time part of Hungary.
In May 1944, Csatary was named chief of an internment camp at a Kosice brick factory that served as a departure point for about 12,000 Jews bound for Auschwitz and other Nazi death camps. Authorities said Csatary was present when the trains were loaded and sent on their way.
Csatary "regularly" used a dog whip against the Jewish detainees "without any special reasons and irrespective of the assaulted people's sex, age or health condition," the prosecutors' statement said.
As one train departed with some 80 Jews crammed into one railcar, Csatary refused a request by one of the Jews to cut holes in the walls of the wagon to let more air in, the statement said.
Csatary was convicted in absentia for war crimes in Czechoslovakia in 1948 and sentenced to death. He arrived in the Canadian province of Nova Scotia the following year, became a Canadian citizen in 1955 and worked as an art dealer in Montreal.
In October 1997, Canadian authorities said the 82-year-old had left the country voluntarily to avoid deportation. His citizenship had been revoked in August on the grounds that he had lied about his past when he first immigrated to Canada.
Citizenship and Immigration Canada said in a statement that Csatary "had provided false information about his nationality, and had failed to provide information concerning his collaboration with Nazi occupation forces while serving with the Royal Hungarian Police and, while in this service, his participation in the internment and deportation to concentration camps of thousands of Hungarian Jews."
Ibolya said the investigation was continuing, adding prosecutors were waiting for information from Israeli and Canadian authorities as well as potential testimony from Holocaust survivors.
"I expect this case to continue for months, even taking into account that we are treating it as one that we would like to conclude as soon as possible," Ibolya said.
In Israel, Efraim Zuroff, director of the Wiesenthal Center's Jerusalem office, applauded the arrest.
"When you look at a person like this, you shouldn't see an old frail person, but think of a man who at the height of his physical powers devoted all his energy to murdering or persecuting and murdering innocent men, women and children," Zuroff told the Associated Press.
Hungarian prosecutors say Zuroff first told officials about Csatary in September 2011, meeting with them as recently as July 9 to provide more data about him.
While prosecutors acknowledge Zuroff's role in the case, they have also criticized him for alerting the press in April about his findings.
Ibolya said that by making the case public, Zuroff may also have put Csatary on alert, increasing the chance that he would try to escape and "greatly endangering the success of the investigation."