Nicolas Sarkozy, 59, appeared before a judge in Paris late on Tuesday after 15 hours of questioning by anti-corruption police.
This is thought to be the first time a former French head of state has been held in police custody.
Nicolas Sarkozy’s lawyer, Thierry Herzog, and a magistrate, Gilbert Azibert, were also placed under formal investigation over the same allegations.
A second magistrate called in for questioning, Patrick Sassoust, had not appeared before a judge as of Tuesday night.
When a suspect is placed under formal investigation, he or she is then examined by a judge, who determines whether there is sufficient evidence for the suspect to be charged.
The step often, but not always, leads to trial. Influence-peddling can be punished by up to five years in prison and a fine of 500,000 euros ($684,000).
Nicolas Sarkozy was released from custody around midnight after appearing in court in Paris.
He had been brought to the court from the judicial police office in Nanterre, west of the French capital, where he had been interrogated.
Paul-Albert Iweins, the lawyer representing Thierry Herzog, said the case rested only on “phone taps… whose legal basis will be strongly contested”.
“There’s not a lot in this dossier, since none of the material elements of what I’ve seen, and what we could contest, support the accusations,” he added.
The inquiry arose out of a separate investigation into whether Nicolas Sarkozy had received illegal funding for his election campaign in 2007 from the late Libyan leader, Muammar Gaddafi.
Nicolas Sarkozy is hoping to challenge again for the presidency in 2017 and the inquiry is seen as a blow to his hopes of returning to office.
Investigators are trying to find out whether Nicolas Sarkozy, who was president from 2007 to 2012, had promised a prestigious role in Monaco to Gilbert Azibert, in exchange for information about an investigation into alleged illegal campaign funding.
They are looking into claims that Nicolas Sarkozy was warned his phone was being bugged as part of the Gaddafi inquiry.
Nicolas Sarkozy’s predecessor, Jacques Chirac, was given a suspended prison sentence in 2011 for embezzlement and breach of trust while he was mayor of Paris but he was never questioned in custody.
An investigation was launched in February into whether Nicolas Sarkozy had sought inside information about the inquiry into his 2007 election campaign funding.
It is alleged that Nicolas Sarkozy was kept informed of proceedings against him while a decision was made over whether his work diaries – seized as part of the funding inquiry – should be kept in the hands of the justice system.
The Court of Cassation ruled in March 2014 that the diaries should not be returned.
Investigators believe the former president was tipped off that his phone was being bugged as part of the inquiry.
Nicolas Sarkozy insists the allegations against him are politically motivated. He is seeking to regain the leadership of the centre-right UMP party later this year.
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