The Guardia di Finanza were acting on orders from Parma prosecutors, who have the right to hold suspects in custody if they have reason to believe the suspect will tamper with evidence or flee.

Under Italian law, insolvency status allows Parmalat to pay new operating expenses while existing creditors have to file applications with the Court during the next 120 days.

Parmalat, which has annual sales of $9 billion from dairy and juice products, was thrown into crisis just two weeks ago when the company was forced to admit that US$4.9bn of its assets supposedly held in Cayman Islands funds had gone missing. Since then its balance sheet hole has widened to more than US$12 after what Italian police say is 15 years of false accounting.

Mr. Tanzi, 65, founded Parmalat in 1961, but resigned as chairman and chief executive when the scandal broke. Former Chief Financial Officer Fausto Tonna told Milan prosecutors last week that Mr. Tanzi was aware of the elaborate network of offshore companies that were used to hide the money.

In an affair that is being labelled as Europe's Enron - and will probably have equivalently grave consequences - auditor Grant Thornton is insisting that it is innocent. Police last week raided Grant Thornton's Milan offices, but chief of Grant Thornton's Italian operations, Lorenzo Penca, said in a statement on Friday, "If anything, it was we who were victims of grave fraud." The affair began when Bank of America told Grant Thornton, auditor for Bonlat, a Cayman Islands subsidiary of Parmalat, that the purported accounts holding US$4.9bn simply didn't exist.