Paul Schäfer, 87, was taken in critical condition to a prison hospital where he had been sentenced in May 2006 to 20 years in jail for sexual abusing and torturing children at his armed enclave in southern Chile.
"Mr Schäfer has a heart problem. He is being given respiratory assistance and will be closely monitored. He is probably in danger of dying," said national police chief Alejandro Jimenez.
"There is nothing to show that he could die soon, but he is in critical condition," he added.
Schäfer set up the large, self-sufficient German colony in an isolated region south of Santiago in 1961 after fleeing Germany to escape child abuse charges.
The 13,000-hectare (32,000-acre) mountain resort, 350 kilometers (215 miles) south of Santiago, was home to about 300 refugees from Nazi Germany and their descendants. It was equipped with a hospital and an airport, and became a "state-within-a-state."
But he later fled to Argentina in August 1996 after the families of the abused children filed complaints.
The property was seized in 2005 by the Chilean state, and Schäfer was arrested in March 2005 and extradited back to Chile.
Schäfer was also charged with collaborating in human rights abuses during the regime of former Chilean dictator Augusto Pinochet's 1973-1990, including allowing Chilean military agents to use Colonia Dignidad to torture political prisoners who had disappeared.