In the latest scandal to rock the Catholic Church, Father Pietro Vittorelli and his brother Massimo are suspected of taking the money from funds that were raised by the abbey for charity.
Massimo managed the abbey's accounts between 2008 - the year the embezzlement allegedly got underway - and 2013, Il Messaggero reported.
Vittorelli , who in 2010 was reported by the local prefecture for allegedly taking ecstasy, is accused of spending up to €34,000 a month on all sorts of extravagances, including travel, hotels and shopping trips to London. He was abbott until 2013.
The pair allegedly concocted a plan that enabled them to transfer the cash into a jointly-owned account held at Monte dei Paschi di Siena.
Police on Wednesday seized more than €588,000 worth of assets belonging to the brothers.
The Abbey of Montecassino, founded nearly 1,500 years ago, is located half way between Rome and Naples and is one of Italy's most visited religious sites.
The revelations come a week after the Vatican arrested a priest and a former employee on suspicion of leaking documents, which formed the basis of two new books, detailing the murky world of the Vatican's finances.
Journalists Gianluigi Nuzzi and Emiliano Fittipaldi, the authors of the books published last week, are also being investigated for possible complicity "in the offence of divulging confidential news and documents", the Vatican said on Tuesday.