The 63-year-old was arrested by judicial police in Paris and taken to their headquarters in the suburb on Nanterre, local media reported.
He is to be questioned as part of a probe into suspected irregularities over his election campaign financing, according to an official in the French judiciary.
The probe related to alleged Libyan funding for Sarkozy’s 2007 campaign, Le Monde newspaper reported.
Sarkozy is said to have received the kickbacks in 2007 during the presidential election campaign that swept him to power for a single five-year term.
French law bans candidates from receiving cash payments above £6,300, but the massive donation is said to have been laundered through bank accounts in Panama and Switzerland.
Sarkozy is now under huge pressure to explain himself in the light of what his opponents called compelling evidence, and faces corruption charges over the next 48 hours.
A document made public in Paris is said to show that the French leader and the former Libyan dictator made an illegal financial deal.
It was written in Arabic and signed by Mussa Kussa, Gaddafi’s intelligence chief in 2006.
It refers to an “agreement in principle to support the campaign for the candidate for the presidential elections Nicolas Sarkozy for a sum equivalent to €50million (£43million)”.
A bundle of incriminating evidence was originally leaked by senior members of Libya’s National Transitional Council to French investigative news site Mediapart.
A governmental briefing note among papers sent to Mediapart points to numerous visits to Libya by Sarkozy and his colleagues which were aimed at securing funding.
One, said to have taken place on October 6, 2005, led to ‘campaign finance to NS’ being “all paid” – assumed to be a reference to Sarkozy.
At the time, Sarkozy was an ambitious interior minister who was raising money for his presidential election campaign, even though taking cash from a notorious tyrant would have broken political financing laws.
Mediapart claims that the €50million referred to in the note was laundered through accounts including a Swiss one opened in the name of the sister of Jean-Francois Cope, the leader of Sarkozy’s UMP party, who are now called the Republicans.
The money was then allegedly distributed through an arms dealer called Ziad Takieddine, who was acting as a middle man between Arab despots and French politicians.