The ministry stressed however that Netanyahu himself was not a suspect in the case.
Law enforcement agencies have been looking in recent months into the deal to buy Dolphin submarines from Germany's ThyssenKrupp.
In November, the attorney general ordered police to look into allegations of improper conduct related to the deal.
The justice ministry said in a statement that in light of evidence collected by police, the attorney general decided to launch a full-fledged investigation.
Some of the police evidence raise suspicions that some of the people involved have committed "crimes pertaining to public corruption," it said.
The statement did not mention names.
Media reports have alleged a conflict of interest over the role played by David Shimron, a relative of the prime minister and the Netanyahu family lawer who also represents ThyssenKrupp in Israel.
Netanyahu himself is being investigated over corruption suspicions, reportedly involving receiving gifts from Israeli businessman and Hollywood producer Arnon Milchan.
The Israeli premier is also being probed over the suspicion he sought a a secret deal with Amnon Moses, publisher of Israel's top-selling newspaper Yediot Aharonot.
The discussed deal, which is not believed to have been finalized, would have seen Netanyahu receive positive coverage in return for helping curb Yedioth's competitor, the pro-Netanyahu freesheet Israel Hayom.
Netanyahu rejected any charges of misconduct, and said he was the target of a campaign by political opponents.