Father Stefano Maria Cavalletti was arrested after police arrived at the party in Milan to investigate a report of excessive noise.
The 45-year-old is accused of dealing cocaine and it's alleged he tried to flush the drug down the toilet when police arrived at the event.
It's also claimed Father Cavalletti attempted to rip up his passport to try and protect his identity.
His parish of Carciano di Stresa in Lake Maggiore was not told about the incident at first but were made aware when he didn't lead Sunday mass.
The Diocese of Novara has released a statement.
It said: "The Diocese of Novara has learned with deep shock and profound grief of custody to Father Stefano Maria Easels, pastor at Carciano of Stresa.
"It is waiting to know the reasons which necessitated the serious charges against the diocesan priest."
The statement also said the diocese would be praying for the priest and was waiting for more information about the incident.