Abuja - President Goodluck Jonathan on Wednesday set up a panel to probe allegations that the aviation minister purchased two armoured vehicles worth $1.4 million (870,000 euros), his spokesman said.
Claims that Aviation Minister Stella Oduah ordered the vehicles were first revealed by the US-based website Sahara Reporters and the news has sparked outrage in the country where tens of millions of people live in acute poverty.
"President Jonathan has... today (set) up a three-man administrative panel of inquiry," spokesman Reuben Abati told journalists.
The panel, which includes National Security Advisor Sambo Dasuki and two others, will investigate the acquisition process and aim "to find out the purpose to which the vehicles were procured."
Oduah's spokesman Joe Obi told AFP the minister "has nothing to hide," and will cooperate with the panel.
Lawmakers have scheduled their own inquiry for Thursday.
Oduah has faced scathing public criticism over the past 15 months following a series of plane crashes, including one that killed 158 people in June of 2012.
The Nigerian Civil Aviation Authority (NCAA), which is under Oduah's ministry, has said the vehicles were necessary to transport visiting foreign dignitaries and Oduah herself, but that justification has been met with scepticism.
The NCAA has confirmed the cost of the two vehicles.
Corruption probes are common in Nigeria, but rarely result in the punishment of powerful officials and Jonathan's move is unlikely to tame mounting frustration over the latest reports of lavish spending by politicians.
Police on Wednesday arrested a prominent activist who tried to march protesters toward the aviation ministry while calling for Oduah to be sacked.
Protest leader Dino Melaye, also a former federal lawmaker, led dozens of demonstrators through the capital Abuja but the group was dispersed by police, who had set up a barricade.
Nigeria has long-been regarded as one of the world's most graft-ridden countries, where massive oil wealth has been squandered over decades.
Most of the country's 160 million people live on less than $2 dollars a day, but lawmakers are among the highest paid in the world, earning an estimated $1 million dollars per year, including benefits and allowances.