Mr Obama warned his successor less than 48 hours after the November election during a conversation in the Oval Office, former Obama officials said.
Mr Flynn's contacts with a Russian envoy left him vulnerable to blackmail, a Senate panel heard on Monday.
He was fired in February for concealing the nature of these contacts.
Mr Flynn, a retired army lieutenant-general, misled the Trump administration about discussing US sanctions against Russia with the country's envoy, Sergei Kislyak, before the inauguration.
White House press secretary Sean Spicer told the daily briefing on Monday: "It's true that President Obama made it known that he wasn't exactly a fan of General Flynn's."
But Mr Spicer said that should not come as a surprise "given that General Flynn had worked for President Obama [and] was an outspoken critic of President Obama's shortcomings specifically as it related to his lack of strategy confronting Isis and other threats around that were facing America".
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The Obama administration fired Mr Flynn from his role as head of the Defense Intelligence Agency in 2014, citing issues of mismanagement and temperament.
Mr Obama's warning to Mr Trump came before concerns emerged about Mr Flynn's contacts with the Russian ambassador, a former Obama official told NBC News.
The Democratic president reportedly thought Mr Flynn was not suited for such a high-level position.
An ongoing feud - Anthony Zurcher, BBC News, Washington
When Mr Trump sat down with Mr Obama just two days after winning the election last November, it was smiles all around. Now, according to reports, it turns out Mr Obama spent part of the time warning him to steer clear of Michael Flynn - and the president-elect ignored his advice.
In hindsight, Mr Trump would have been better served heeding his predecessor's advice, as the ensuing scandal over contacts with Russian Ambassador Sergei Kislyak quickly ended Flynn's controversial tenure as the president's national security advisor.
The timing of this revelation, just hours before Sally Yates testified on Mr Flynn's Russian ties and her own efforts to warn the Trump administration, was no fluke.
The president took a shot at the woman he fired as acting attorney general via Twitter this morning, and now Mr Obama's team is coming - anonymously - to her defence.
It's yet the latest bit of evidence of an ongoing feud between the past and present presidential administrations as well as the tension between Mr Trump's inner circle and the US intelligence community.
The stakes are high, and there's no indication anyone is backing down.
But on Monday, Mr Spicer questioned the former president's objections to Mr Flynn.
"If Mr Obama was truly concerned about General Flynn," the White House press secretary told reporters, "why didn't he suspend General Flynn's security clearance, which they had just reapproved months earlier?
"Additionally, why did the Obama administration let Flynn go to Russia for a paid speaking engagement and receive a fee?"
The revelation came as former acting Attorney General Sally Yates testified for the first time in public before a congressional panel about Mr Flynn's contacts with Mr Kislyak.
A 27-year Justice Department prosecutor, she was fired in January by Mr Trump after she refused to uphold the administration's travel ban.
Ms Yates told the Senate Judiciary subcommittee she had warned White House counsel Don McGahn about Mr Flynn during an in-person meeting on 26 January.
She said she told Mr McGahn she had seen statements regarding Mr Flynn's contacts with the Russian envoy "that we knew not to be truth".
Ms Yates said Mr Flynn had "lied" to the US vice-president, and the Russians were aware of this.
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