Local police said there appeared to be no indication of a terror motive, with France still on edge after the beheading of a teacher, Samuel Paty, by an Islamist extremist in October.
Passers-by alerted police Monday afternoon when they saw a box fall from a window of a building in the city centre, a police spokesman told AFP.
Shortly after police arrived, a man appeared at the window of the apartment, his hands covered in blood. The man, who was not armed, was then arrested after officers broke down the door.
According to a police source, who asked not to be identified by name, the head could belong to one of the two homeless people who had stayed the night in the apartment.
Police had been called there during the night of Sunday to Monday because of a fight.
Other than the victim and the person who was arrested, no one else was in the apartment when the police intervened.
Toulon's Mayor Hubert Falco in a statement condemned an “unspeakable act,” adding that the individual's motives were not yet known.