Rana Sanaullah, the Law Minister of Punjab province, said the US national – identified in media reports as Raymond Davis – had been arrested under Section 302 of the Pakistan Penal Code which relates to murder.
A First Information Report was registered against the American following a complaint from the brother of one of the dead men.
"Action will be taken against the US national according to Pakistani laws. The Punjab government will ensure that the foreigner will be prosecuted according to the law of the land and no pressure will be accepted in this regard," Sanaullah told a news conference.
The American was presented in the court of Judge Zafar Iqbal, who remanded him to police custody for six days.
Strict security arrangements were put in place at the court for the hearing this afternoon.
The US consular employee shot and killed two motorcycle-borne men who pulled up alongside his car at a traffic light and apparently tried to rob him in the Mozang area of Lahore yesterday.
A third man died in a road accident involving a speeding US car that was coming to aid the American.
Senior police officer Umar Saeed said the American had told police he had withdrawn money from an ATM shortly before the incident, raising the possibility the two men were following him.
Others police officers said the men were possibly robbers and were carrying pistols.
Sanaullah too confirmed that the two men shot dead by the American were armed.
He said the relatives of one of the dead men had produced a licence for the pistols.
Though all persons have the right to self-defence, an investigation is being conducted to determine whether the American had opened fire after facing a threat to his life, he said.
A separate case had been registered against the American as he had been unable to produce a licence for the weapons used by him, Sanaullah said.
The probe into the incident will be completed in 14 days and a 'challan' presented in court, he added.
Prime Minister Yousuf Raza Gilani condemned the incident and said the government was awaiting the outcome of the investigation.
Interior Minister Rehman Malik said in parliament no foreigner was allowed to carry weapons in Pakistan and the incident was being handled according to Pakistani laws.
A brief statement issued by the US embassy said a "staff member of the US Consulate General in Lahore was involved in an incident yesterday that regrettably resulted in the loss of life".
It added: "The US embassy is working with Pakistani authorities to determine the facts and work toward a resolution".
US officials also said the name of the American given in media reports was incorrect.
The issue of US diplomats or their security detail carrying weapons in Pakistan had emerged as an irritant between the two countries last year.
Analysts believe yesterday's incident could fuel anti-US sentiments in Pakistan.
The incident was reported on the front pages of all newspapers, with the headline in The Nation, known for its anti-US stance, reading: "'American Rambo' goes berserk in Lahore".
An editorial in The Express Tribune said it was reasonable for Western diplomats to travel armed but noted that in America shooting in self-defense can result in a conviction, especially if it can be proved that the accused used excessive force.