Nicolas Sarkozy is accused of accepting thousands of euros from Liliane Bettencourt, now aged 90.
The former president denies taking financial advantage of Liliane Bettencourt.
Nicolas Sarkozy’s lawyer said he would file an appeal against the “incoherent and unfair decision”, AFP news agency reports.
Magistrate Jean-Michel Gentil, who leads the inquiry, unexpectedly summoned Nicolas Sarkozy for a face-to-face encounter with Liliane Bettencourt’s butler, Pascal Bonnefoy, in the city of Bordeaux.
The judge wanted to determine how often Nicolas Sarkozy had met Liliane Bettencourt in 2007.
While Nicolas Sarkozy has maintained he only saw her once during that year, Pascal Bonnefoy gave a different account on Thursday.
Following the hearing, prosecutors said Nicolas sarkozy had been placed under formal investigation “for taking advantage of a vulnerable person during 2007 to the detriment of Liliane Bettencourt”.
Under French law the court’s decision falls short of a formal charge.
Investigators will press ahead with the enquiry before deciding whether he should face a trial.
Nicolas Sarkozy previously hinted that he was considering another tilt at the presidency in 2017. The outcome of the investigation could determine whether he will make a return to politics, observers say.
Police raided Nicolas Sarkozy’s home and offices last July after he lost his presidential immunity.
The former president was declared a material witness in November, which meant he was a suspect but had not been formally charged.
Nicolas Sarkozy met Liliane Bettencourt when he was mayor of the wealthiest suburb in Paris and forged a close friendship with her over the years.
He was a regular visitor to the family mansion, according to her staff.
It is alleged that staff acting for Liliane Bettencourt gave 150,000 euros in cash to Nicolas Sarkozy’s aides during his successful 2007 campaign to become president.
Individual campaign contributions in France are limited to 4,600 euros.
Liliane Bettencourt’s former accountant, Claire Thibout, has alleged Nicolas Sarkozy’s campaign treasurer at the time – Eric Woerth, who later became budget minister – collected the cash in person.
Claire Thibout also revealed in a leaked police interview that Nicolas Sarkozy, while mayor of Neuilly from 1983 to 2002, paid “regular” visits to the Bettencourt house.
But Nicolas Sarkozy has dismissed as mere gossip claims that he took envelopes stuffed with cash.
“[The Bettencourt] never gave me a single penny and I never asked them for any,” he was quoted as saying by the Sud-Ouest newspaper.
Eric Woerth, who was forced to resign as UMP party treasurer in July as a result of the scandal, is already under formal investigation over the 150,000 euro payment allegations.
The allegations surrounding Nicolas Sarkozy and Eric Woerth first surfaced in connection with a trial over Liliane Bettencourt’s estimated 17 billion euro fortune.
Eric Woerth denies any wrongdoing, as does Liliane Bettencourt.
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