Zagorec was arrested on an international warrant issued by the Croatian judiciary, Austrian Interior Ministry spokesman Rudolf Gollia told APA news agency.
The Croatian general was taken into custody by members of the Austrian anti-terrorism agency.
A spokesman for the Vienna law firm Lansky, Ganzger & Partner, which represents the Croatian general, told APA that Zagorec would be taken before an investigating judge on Wednesday to decide whether he would remain in custody and be released on bail.
The law firm insisted that the charges by Croatian authorities were politically motivated. It said that Zagorec had been issued residence and work permits in Austria in 2000 and that he lived there with his family, rejecting allegations by Croatian authorities that there was a risk of him going into hiding.
The retired general is suspected of abuse of office, namely that in 2000 he took from a Defence Ministry safe jewels he had received from a German arms dealer in 1993 as collateral for five million US dollars from the Croatian Defence Ministry intended for the purchase of weapons for Croatia's defence.