Investigators are examining an alleged system whereby money paid in arms sales commissions -- legal at the time -- were channelled back into the illegal funding of political activities in France.
It is alleged that a bombing in Karachi that killed 11 French engineers in 2002 was revenge for the cancellation of commissions promised to officials involved in the sale of French submarines to Pakistan.
Magistrates are probing whether arms kickbacks were used to finance the 1994-95 presidential campaign of then-prime minister Edouard Balladur, whose budget minister and campaign spokesman was Sarkozy.
Police on Wednesday detained and questioned Balladur's then-cabinet chief and presidential campaign manager Nicolas Bazire over the alleged illegal party financing, a judicial source said.
Police also searched the home and office of Bazire, today a top manager at luxury giant LVMH, who was also best man at Sarkozy's 2008 wedding to former supermodel Carla Bruni.
Sarkozy's communications advisor until the mid-1990s, Thierry Gaubert, is due to be questioned on Wednesday by a magistrate after he was detained for questioning on Monday.
The magistrate, Renaud van Ruymbeke, could charge Gaubert after their meeting.
Investigators are probing links between Gaubert and Franco-Lebanese businessman Ziad Takieddine, who was charged last week with fraud over two arms contracts with Pakistan and Saudi Arabia in which he was allegedly middleman.
A witness questioned by police on September 8th said Takieddine travelled several times to Switzerland in the mid-1990s with Gaubert to get cases of cash that were handed over to Bazire in Paris, news website Mediapart reported.
News weekly Nouvel Obs identified the witness as princess Helene of Yugoslavia, who went through a difficult divorce from Gaubert.
France's Constitutional Court advised in vain as early as 1995 that Balladur's campaign financing accounts be rejected because of question marks over where the cash came from. Balladur eventually lost the election to Jacques Chirac.