Stadler has been with Volkswagen-Audi since 1994 and has held the top managerial spot at Audi since 2007, two years prior to the alleged emissions-cheating activities.
The move follows a search last week of Stadler's private residence, ordered by Munich prosecutors investigating the manager on suspicion of fraud and indirect improprieties with documents.
Volkswagen, which last week agreed to pay a fine of €1 billion ($1.2 billion) imposed by German prosecutors, confirmed the arrest.
Rupert Stadler, CEO of German auto producer Audi, briefs the media during the annual press conference in Ingolstadt, Germany.
The so-called dieselgate emissions scandal first came to light in September 2015. A judge has remanded him in custody.
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"Audi CEO Rupert Stadler was provisionally arrested this morning", the company said in a statement.
A court hearing to determine whether Stadler would remain in jail was ongoing, the company said, adding that it wouldn't comment further due to the ongoing investigation.
VW admitted in September 2015 to using illegal software to cheat US emissions tests on diesel engines, sparking the biggest crisis in the company's history and leading to a regulatory crackdown across the auto industry.
Volkswagen has pleaded guilty to criminal charges in the United States. Munich prosecutors and Stadler himself were not immediately available for comment. The executive was arrested at his home in Ingolstadt, in the early hours on Monday, they said.