Dassault won the right to enter exclusive negotiations with India after lodging a lower bid than its European rival in the world's biggest single defence deal currently in process, an Indian government source told AFP.
Dassault, whose Rafale fighter was pitted against the Eurofighter Typhoon, said it was "honoured and grateful" to be selected and stressed its commitment to meeting the "operational requirements" of the Indian Air Force.
The French government welcomed the news but added that the final contract had yet to be signed.
"At this stage -- and I want to be cautious -- we are in a phase of exclusive negotiations," French Minister of State for Foreign Trade Pierre Lellouche told France's BFM radio.
Lellouche declined to release financial details of Dassault's bid.
Dassault Aviation shares soared more than 20 percent on the Paris stock exchange after the news broke.
French President Nicolas Sarkozy hailed Dassault's selection, saying that it "goes far beyond the company that makes them, far beyond aerospace -- it is a vote of confidence in the entire French economy."
He said the firm was selected "thanks to the competitiveness" of its bid.
"The negotiation of the contract will begin very soon with the full support of French authorities. It will include major transfers of technology guaranteed by the French state," Sarkozy said.
Eurofighter said it respected India's decision but was disappointed.
"Although this is not yet a contract signature and contract negotiations are still ahead, we are disappointed," a statement said.
The huge contract to supply war planes to fast-developing India has been fiercely fought over for four years.
India in April pulled a surprise by cutting out US bidders Boeing and Lockheed Martin -- much to Washington's disappointment -- as well as dropping Sweden's Saab AB and the Russian makers of the MiG-35 from the race.
That left Dassault and Eurofighter -- a consortium of Britain's BAE Systems, Italy's Finmeccanica and the European Aeronautic Defence and Space Company (EADS).
James Hardy, Asia-Pacific editor of Jane's Defence Weekly, said the decision was "a big win for the Rafale" but warned that the French side faced a period of tough negotiation.
"Rafale has been selected as the preferred bidder but any student of Indian procurement knows that this means nothing until the contract is physically signed," Hardy said.
He predicted that the recent sharp depreciation of the Indian currency and "standard contractual wrangling" could delay any final deal for years.
The tendered contract is for the outright purchase of 18 combat aircraft by 2012 with another 108 to be built in India with options to acquire more.
Such a large order attracted strong lobbying during visits to India by US President Barack Obama, Sarkozy, British Prime Minister David Cameron and Russian President Dmitry Medvedev.
India, the biggest importer of military hardware among emerging nations, issued a request for proposals in 2007 and trials of aircraft from the six companies competing for the deal began a year later.
The procurement of the fighter jets is a key part of India's military upgrade programme, aimed at securing its borders against rivals Pakistan and China.
The Rafale and the Typhoon were both in action over Libya last year during the international operation to enforce a no-fly zone and protect civilians from Moamer Kadhafi's forces.
Both plane makers were relying on the contract to secure their futures amid falling defence budgets in developed markets, with Dassault also keen to sign up the first foreign buyer for the Rafale.
French Defence Minister Gerard Longuet warned in December that the Rafale production line would be halted if none of the jets could be sold abroad.
France has ordered 180 of the planes.