Villar, 67, a senior vice president of FIFA, world football's governing body, was being held on suspicion of abusing his position to embezzle funds from the federation, among other charges, the source said.
FIFA declined to comment on the arrest, with a spokesman saying: "As the matter seems to be linked to internal affairs of the Spanish Football Association, for the time being we kindly refer you to them for further details."
Villar's son Gorka and another senior federation official were among those also detained in the probe which notably focuses on allegations of skimming profits from international matches, the source told AFP.
Police who carried out raids on the federation headquarters and other locations related to the probe said that Villar is suspected of organising international football matches as part of a scheme to embezzle funds for the benefit of his son.
Inigo Mendez de Vigo, a spokesman for the Spanish government, told public television in response to the Villar arrest that "no-one is untouchable and everyone must obey the law."
Villar, a former acting president and current vice president of UEFA, which runs European football, has headed the Spanish federation since 1988.
- Ethical questions -
=====================
His son Gorka Villar is a former director general of CONMEBOL, the South American football confederation, a post he quit in July last year. He also served on a FIFA advisory panel aimed at reforming the organisation mired in corruption allegations.
Villar senior has overseen a glorious period in the Spanish national team's history as they won three back-to-back major tournaments, triumphing at Euro 2008 and 2012 either side of a first ever World Cup in South Africa in 2010.
Javier Tebas, the head of the Spanish league, has had a long-running feud with Villar and refers to him as a feudal baron.
The former Athletic Bilbao midfielder, capped 22 times for Spain, has had a number of ethical issues over the years. Most notably he was fined 25,000 Swiss francs ($25,700) by FIFA's ethics committee in 2015 for failing to cooperate during an investigation into the awarding of the 2018 and 2022 World Cups to Russia and Qatar.
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