The retired Bolivian general famous for capturing Ernesto "Che" Guevara was ordered held under house arrest in connection with an alleged plot against President Evo Morales.
Prosecutors allege that General Gary Prado exchanged an "ultrasecret" encrypted e-mail with Eduardo Rozsa, a Bolivian-born Hungarian who was slain in an April 2009 raid by an elite police unit.
Authorities said Mr Rozsa and two other men killed - an Irishman and an ethnic Hungarian from Romania - were involved in a conspiracy to create a separatist right-wing militia in the eastern, opposition-dominated state of Santa Cruz.
Mr Morales said at the time that a plot to assassinate him had been foiled.
During a court appearance on Thursday, Gen Prado denied prosecutors' allegations that he was complicit with the group.
"It seems laughable to me that a general with my past would put himself under the command of a mercenary," Gen Prado said. He also said documents written by him that were found on Mr Rosza's computer came from a class he teaches at a private university in Santa Cruz.
Judge Betty Yaniquez's house arrest order also targets two other suspects.
In all some 20 people - including Gen Prado's son, who has the same name - are under investigation in the case, all linked to conservative groups in Santa Cruz. Seven were detained and four are fugitives.
Prosecutor Marcelo Soza is still investigating and has not filed formal charges.
The case has major political overtones, with the Morales government saying that prominent opposition leaders in Santa Cruz were involved. Those leaders deny involvement and accuse Mr Morales of persecuting his opponents.
The Argentinian-born Guevara, a hero of the Cuban revolution, was captured in 1967 while trying to foment an uprising in Bolivia and later executed.
Gen Prado was an army captain at the time and commanded the patrol that captured the revolutionary, hungry and weak, in Bolivia's southeastern jungle.
Gen Prado said in his memoir Como Capture al Che, or How I Caught Che, that he was not involved in Guevara's subsequent killing on orders of the military command.
"The warrior I knew is not the Che of myth and legend," Gen Prado wrote. "He was a defeated man at the end of his strength."