The Supreme Prosecutors' Office Special Investigation Panel accused Lee and a top aide of embezzling nearly $7.8 million from the National Security Bureau and laundering it during his term from 1998 to 2000, the Taipei Times reported.
Lee, who was expected to fight the charges, could be sentenced to as much as 10 years in prison if convicted but prosecutors were quoted as saying they may ask for a lenient sentence because of his age.
Lee's political allies criticized the indictment saying it was based on evidence that had been dismissed in an earlier case.
China's state-run Xinhua news agency, while reporting Lee's indictment, said Lee's successor, Chen Shui-bian, is currently serving a jail term of 17 and a half years on two bribery convictions. Chen was convicted last year, the report said.
The New York Times reported Lee helped steer Taiwan toward democracy. Taiwan's current President Ma Ying-jeou and his Kuomintang party have been advocating closer relations with the mainland.
Communist China has never given up its sovereign claims over Taiwan but the two sides have had separate governments for six decades.