Justice Secretary Leila de Lima said police arrested Daniele Bosio at a water fun park near Manila at the weekend following a tip-off from a local child rights group.
"He is now in detention while his case is undergoing preliminary investigation with the fiscal (prosecutor)," de Lima told AFP.
"He was caught in the company of three boys, ages 8 to 12 year old."
Bosio, the Italian ambassador to Turkmenistan, was on holiday in the Philippines when he was detained, the Italian foreign ministry said earlier in
De Lima said police alleged Bosio had violated the country's law on anti-trafficking and abuse of children, and prosecutors were conducting follow-up investigations.
In the Philippines, prosecutors officially lay charges in the court.
Neither de Lima nor local police would give details of the specific allegations against Bosio. She did not say how long the investigation would take.
De Lima said Bosio would be unable to invoke diplomatic immunity because he was not stationed in the Philippines.
The police chief for the region with jurisdiction for the case, Chief Superintendent Jesus Gatchalian, said Bosio was being held in a jail in the town of Binan, 39 kilometres (24 miles) from Manila.
"Officials from the Italian Embassy in the Philippines have already visited him," Gatchalian said.
AFP was unable to reach anyone from the Italian embassy for comment.
An official at the embassy initially said only the ambassador would comment on the issue, but subsequent phone calls to try and reach him went unanswered.