The 47-year-old Emmanuel Uwayezu was picked up by the police near Florence, on a warrant issued by Kigali via Interpol.
He had been living in Italy for more than 15 years and served as a vicar in Ponzano, some 20 kilometres (15 miles) from Florence.
Uwayezu is accused by London-based African Rights of being involved in a massacre of "more than 80 young people aged between 12 and 20 years old" from a school in Kibeho in southern Rwanda, where he was headmaster.
The Catholic clergyman defended himself, saying he wanted "to open a trial on this case in order to establish the facts". "I took no part in genocide. Instead, the Bishop and I tried unsuccessfully to save young people massacred by the militia," the Italian news agency, ANSA, quoted him as saying.
The accused will soon appear before an Italian Court.
Another Catholic priest, Athanase Seromba, was arrested in 2002 in Italy and transferred to the International Criminal Tribunal for Rwanda (ICTR), trying key suspects of the 1994 killings.
In December 2006 Father Seromba was found guilty and sentenced to 15 years in prison. Seromba and the Prosecution appealed the verdict. In March 2008, the ICTR Appeals Chamber affirmed Seromba's conviction and increased his sentence to a life sentence. In June, this year, Seromba was transferred to Benin to serve his sentence.
Also Emmanuel Rukundo, a Rwandan Catholic Priest who in 2009 was convicted of genocide and crimes against humanity by the ICTR , was sentenced 25 years' imprisonment in February 2009.
The Rwandan genocide of 1994 claimed lives of about 800,000 people, mainly ethnic Tutsis, according to the United Nations estimates.
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© Hirondelle News Agency