One of Italy's most prominent Catholic cardinals and a former minister have been put under investigation as a corruption scanda, which has tainted the government, spread to touch the Vatican.

Magistrates told Cardinal Crescenzio Sepe and Pietro Lunardi, former Infrastructure and Transport Minister in the centre-right government, they were being investigated for aggravated corruption, judicial sources said.

The magistrates in the central city of Perugia are investigating a web of corruption and favours involving public works contracts, mostly in construction for major events, such as last year's G8 summit and the Millennium celebrations.

Mr Sepe, 67, is being investigated for alleged corruption when he was a Vatican official running the Congregation for Evangelisation of People, a cash-and-real-estate rich department of the Vatican that finances the work of missions abroad.

Mr Sepe, who ran the department until he was moved to Naples in 2006, is suspected of aggravated corruption with Lunardi in connection with a real estate deal.

According to Italian newspapers La Stampa, Corriere della Sera and La Repubblica, in 2004 Mr Lunardi purchased a building in Rome from Mr Sepe's department at a price well below market value.

The next year, when Mr Lunardi was minister, he approved a decree allocating funds for the restoration of historic church buildings, including the 16th century headquarters of the mission department facing Rome's Spanish Steps.

The Vatican said Mr Sepe would cooperate with magistrates but proper procedures had to be used as the Vatican is a sovereign state.