It relates to spending in his unsuccessful 2012 bid for re-election when his campaign costs were more than twice the legal limit, the BBC reported.
Sarkozy, 61, was questioned all day on Tuesday by magistrates before being informed he was under investigation.
He has repeatedly denied knowledge of the overspending.
He has said he was not involved in the details of his campaign finance.
The move is a prelude to a possible trial but does not necessarily mean Sarkozy will be prosecuted. The questioning is seen as a blow to his attempts to regain the presidency of the country in the 2017 elections.
Sarkozy is the head of France's center-right The Republicans political party (previously the UMP) and was the president of France from 2007 to 2012.
Sarkozy was also designated as an "assisted witness" in connection with "accusations of using false documents, fraud and breach of trust", prosecutors added.
Four senior figures in Sarkozy's 2012 campaign, including his campaign manager and treasurer, have previously been placed under formal investigation in relation to what has come to be known as the Bygmalion scandal.
It is alleged that millions of euros in false invoices were issued by the Bygmalion PR company, which organized some of Sarkozy's appearances during his campaign.
