Calisto Tanzi, Parmalat's former boss, has admitted siphoning 500m euros (£352m; $624m) from the scandal-hit food firm, according to his lawyer.
Parmalat is a household name in Italy
As many as 20 people might now face criminal charges for suspected fraud after Parmalat was declared officially insolvent on Saturday.
The affair has grown into one of Europe's biggest financial scandals, hitting global banks and small-time investors, as well as dairy farmers.
Mr Tanzi is currently in custody.
It was during police questioning in Milan earlier on Monday that Mr Tanzi "admitted to diverting funds", his lawyer Fabio Belloni said.
The Italian media has reported that Mr Tanzi is likely to face charges including market rigging, false auditing and fraudulent bankruptcy.
Parmalat's problems were brought to a head last week after the discovery that a bank account on the Cayman Islands, supposedly containing 3.9bn euros, did not in fact exist.
Over the weekend, lawyers for Mr Tanzi were adamant that their client had not stolen any money.
"No money disappeared, (there were) just non-existent assets," said another of Mr Tanzi's lawyers, Michele Ributti.
Court papers submitted over the weekend, however, allege Mr Tanzi may have misappropriated as much as 800m euros during the past decade.
According to David Wiley, the BBC's Rome correspondent, Mr Tanzi's defence "is that he stole no money, merely kept on covering up a worsening financial situation which he hid from shareholders".
The company's shares, meanwhile, have been suspended from trading on the Italian stock market.
Parmalat itself is being run by an Italian government-appointed rescue administrator, so it can continue operations and pay its suppliers.
Among them are Italian dairy farmers, to whom the firm owes some 120m euros.
Parmalat, which employs 36,000 people worldwide, will also now be able to put financial creditors on hold, while it draws up a recovery plan within six months and two teams of Italian investigators probe its books.
Recent reports also suggest that Fausto Tonna, Parmalat's former chief financial officer, has told Italian investigators that the fraud dates back until the late 1980s.
The scandal at Parmalat, now dubbed "Europe's Enron" after the downed American energy giant, could also have grave implications for the company's auditors, the Italian branch of accountancy firm Grant Thornton.
According to reports, the international head of Grant Thornton has ordered an internal investigation into the affair.
The accountancy firm has been auditor to Parmalat or some of its main subsidiaries since 1990.
Grant Thornton has so far insisted that its staff have acted correctly, and that the fake document has made them a victim of fraud as well.
Questions have also been raised about how Italy's financial regulators could have missed the problems at Parmalat.
Italy has also been forced to call on the European Union to waive its rules on state aid to prevent Parmalat's woe from creating a wider dairy sector crisis.
The government is primarily concerned to minimise any wider fall-out from Parmalat, which plays a crucial role as Italy's biggest food company, purchasing 8% of the country's milk production.
Italy's treasury has also proposed creating a powerful regulator able to prevent any future repeat of the Parmalat scandal.