Prosecutors said that Father Francesco Saverio Bazzoffi would "stage shows" at the House of the Sainted Archangels, an organisation he founded.
During the events, which regularly attracted crowds of over 400 people, a number of associates would "pretend to be possessed by demons" and Fr Bazzoffi would allegedly exorcise them using ancient and obscure rites.
He would then offer to "heal" members of the audience who were sick, and solicit donations to his organisation.
One witness told police: "During Mass, the priest spoke in Aramaic, and strange things happened. I do not know if it was group hysteria or our suggestibility, but I remember one old woman screaming in a man's voice while five big guys held her down."
Prosecutors, who have also put 13 of his associates under investigation, started monitoring Fr Bazzoffi in 2005. His house was raided last month, and several documents were seized that showed the priest had £3 million in his bank account.
Fr Bazzoffi, who heads the matrimony office of the diocese of Florence, was publicly cautioned against performing exorcisms last October by the Archbishop of the city, Cardinal Ennio Antonelli.
In a letter, the cardinal wrote: "I would like to make clear the following: any sort of special rite of benediction, such as the laying on of hands, is forbidden. Exorcisms are also prohibited." Only priests authorised by the diocese are permitted to carry out exorcisms.
Fr Bazzoffi denies that he had "ever practised" exorcisms and admitted that he did not have a licence. "I have always only carried out blessings," he said. He added that he "welcomed" the cardinal's admonition, since "it showed that work like mine can trigger suspicion".
He denied that he had ever "encouraged" sick people to believe he could heal them. "These accusations would make me laugh, if it was not such a serious thing."
He added: "The House of the Sainted Archangels is not a registered business and does not have a bank account. So I opened one in my own name.
"All the money for our charitable works goes through it. It may seem like a lot, but it is made up of lots of small donations. Around 30,000 people come to us every year. The police should be able to see that the money always goes out to our projects in India and the Philippines."