SAO PAULO--Brazil's federal police arrested three former lawmakers Friday as part of an investigation of alleged corruption involving contracts between state-run oil firm Petroleo Brasileiro SA, construction firms and politicians. Petrobras officials took a cut of the cash from inflated contracts, funneling the rest to lawmakers and political parties, according to investigators.

Police arrested Andre Vargas, a former lawmaker of the ruling Worker's Party; Luiz Argolo, a former lawmaker of political party Solidariedade; and Pedro Correa, of the Progressive Party (PP) related to corruption allegations, said federal police spokesman Paulo Roberto da Silva. He said more details of the operation would be disclosed later Friday at a news conference.

Mr. Vargas and Mr. Argolo are accused of involvement with currency dealer Alberto Youssef, previously arrested by the federal police as part of "Operation Car Wash." Messrs. Vargas and Argolo have previously denied involvement in the alleged corruption scheme. It is not clear what the accusations are against Mr. Correa.

The lawyers of three former lawmakers couldn't immediately be reached for comment.

On Thursday, João Vaccari, the treasurer of Brazil's Workers' Party, testified before a congressional committee investigating allegations of kickbacks and bribery at Petróleo Brasileiro, known as Petrobras. He said that donations to his party were all legal and approved by the country's electoral court.

The donations to the Workers' Party, or PT, were similar to those made by the companies under investigation to many other political parties, Mr. Vaccari told the committee. Brazilian police and prosecutors allege Petrobras executives conspired with many of the company's suppliers over ten years until the end of 2014 to inflate the value of contracts.

Since the start of the Car Wash probe--so named because of one of the businesses allegedly involved--in March of 2014--four former Petrobras executives and at least 23 construction executives have been charged with crimes such as corruption and money laundering. Some have admitted wrongdoing in exchange for lesser punishment, prosecutors say, while others have denied involvement and await trial.

Lawyers representing the companies and their executives either denied involvement, said they were cooperating or didn't return requests for comments. So far, there have been no trials or convictions. The case is now is entering its most critical, and potentially explosive, phase. Brazil's Supreme Court in March gave prosecutors the go-ahead to investigate 48 current or former members of Congress.

Write to Rogerio Jelmayer at rogerio.jelmayer@wsj.com

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