Former Guinea-Bissau Interior Minister Marcelino Simoes Lopes Cabral has been arrested on suspicion of supporting rebels from neighbouring Senegal.
The splinter group rejects the 2004 peace deal
Police accuse Mr Cabral of helping a breakaway faction from the Movement of Democratic Forces of Casamance (MFDC) to fight Guinea-Bissau's army.
The fighting began three weeks ago and has displaced thousands of people.
Casamance borders Guinea-Bissau and both areas have a similar ethnic make-up.
Mr Cabral was close to former Guinea-Bissau military leader Ansumane Mane, accused of backing the MFDC.
The AFP news agency says some 8,000 people have fled the recent fighting, mostly to the main Casamance town, Ziguinchor.
AFP also quotes the International Campaign to Ban Landmines (ICBL) as accusing the rebels of laying landmines along the border.
The recent fighting is by far the most serious since the main Casamance rebel movement signed a peace deal with Senegal's government in 2004.
The fighting has mostly been between the rebels and the Guinea-Bissau army but rival rebel factions have also clashed.
The hardline wing of the MFDC, led by Salif Sadio, opposes the agreement and continues to campaign for the independence of Casamance, which is cut off from the rest of Senegal by The Gambia.
Casamance is struggling to rebuild itself following the violent separatist rebellion that lasted more than 20 years and killed an estimated 3,500 people.