Kabuga, 84, who was living under a false identity in a flat in Asnières-sur-Seine, near Paris, had been pursued by international justice for 25 years, the ministry said in a statement.
French gendarmes arrested him at 0530 GMT on Saturday, the ministry said.
Kabuga is Rwanda’s most-wanted man, and the United States has put a $5 million (€4.6m) bounty on his head.
A Hutu businessman, he is accused of funding the militias that massacred some 800,000 Tutsis and moderate Hutus over a span of 100 days in 1994.
A top UN prosecutor said on Saturday that this arrest showed that suspects would be brought to justice for crimes in the 1994 bloodshed.
"The arrest of Félicien Kabuga today is a reminder that those responsible for genocide can be brought to account, even 26 years after their crimes," said Serge Brammertz, chief prosecutor of the Mechanism for International Criminal Tribunals in The Hague.
This paves the way for bringing the fugitive in front of the Paris Appeal Court and later to the International Court in The Hague.
(FRANCE 24 with REUTERS, AFP)