A joint operation between Spanish, Irish and UK authorities resulted in six arrests in Alicante on Friday.
Police seized four kilos of cannabis and 15,000 pills, as well as cash, documents and mobile phones linked to an international drug trafficking operation.
A revolver, said to be the same make and model as the one used in the murder of journalist Veronica Guerin in 1996, was also found and Spanish police say a possible link is being investigated.
Policia Nacional posted a video on Twitter on Friday which showed a raid on a Spanish residence. It also showed Gilligan, 68, being led away in handcuffs by armed police.
In a statement, they said: “Those arrested, led by a well-known Irish criminal, were part of a violent group of drug and arms traffickers and specialised in sending illegal merchandise from Spain to the United Kingdom and Ireland through parcels.”
Gardai have confirmed they are working with the Spanish police on the matter.
Authorities said the investigation began in Alicante last year after reports that a gang led by “a well-known Irish criminal” had settled there.
They said the investigation has led to “the total dismantling of the criminal organisation.”
They added: “The six investigated people have been arrested, among them the leader of the group, and four house searches have been carried out where another four kilos of packaged marijuana buds, 11,000 pills, two vehicles, ten mobile phone devices, various documentation have been seized.”
During the search, a Colt Python revolver was also discovered buried in the garden.
They said the gun was the same make and model as the one used in the murder of Ms Guerin.
The Spanish agents are negotiating with the Irish police to determine if it is the same weapon, the statement said.
The journalist’s brother Jimmy Guerin, told the PA news agency he was “surprised” by the news but sceptical about the link.
He said: “I think it’s speculative but I don’t think the Spanish authorities are irresponsible. I’m just sceptical.
“I was informed of the developments before they became public and it has come as a surprise.
“But I’d be sceptical if a gun that was used on the Naas Road turned up in a garden in Spain. Why would you take the risk of bringing it out of the country?”
Gilligan was acquitted of the murder of Veronica Guerin in 2001 after a 43-day trial at the Special Criminal Court.
Judge Diarmuid O’Donovan said the court had “grave suspicions” about Gilligan’s involvement in Ms Guerin’s murder but the evidence produced at trial was not enough to convict him.
However, Gilligan was later sentenced to 28 years in prison for drug trafficking that same year.