Socialist Hollande and the right-wing Sarkozy are to face off in a May 6 second round, but the big surprise of Sunday's first round was the record score for anti-immigrant, anti-EU flag-bearer Marine Le Pen.
Hollande won 28.56 percent of the vote, beating Sarkozy's 27.07, and Le Pen won a best-ever 18.12 percent, according to near-complete interior ministry results.
Hollande told a victory rally in his rural political stronghold of Tulle late Sunday that he was the now the obvious frontrunner for the post.
"The choice is simple, either continue policies that have failed with a divisive incumbent candidate or raise France up again with a new, unifying president," Hollande said.
Sarkozy had sought to put positive spin on the result and brandished his right-wing credentials in a clear nod to Le Pen supporters, despite being the first incumbent to lose a first round vote in modern French history.
Explaining his poor showing as the result of a first round "vote of crisis" amid global economic chaos, Sarkozy told his supporters: "These anxieties, this suffering, I know them, I understand them."
"They are about respecting our borders, the determined fight against job relocation, controlling immigration, putting value on work, on security," he said, hitting on a number of key right-wing themes.
A jubilant Le Pen addressed her supporters after her National Front party's best ever showing, saying: "The battle of France has just begun ... we have exploded the monopoly of the two parties" -- the Socialists and Sarkozy's UMP.
"Nothing will be as it was before ... the people of France have invited themselves to the table of the elite," she said at a remarkably triumphant rally for a candidate who went out at the first hurdle.
"I will give my opinion on May 1," Le Pen said when asked how her supporters should vote in the second round.
The first opinion poll after the first round said that Hollande would beat Sarkozy by 54 percent to 46 in the second round and that the attitude of Le Pen's supporters could be decisive.
Polling institute Ifop said that 48 percent of her backers would switch to Sarkozy and 31 percent to Hollande, while an OpinionWay poll said 18 percent of her supporters would back the Socialist and 39 percent Sarkozy.
The head of Sarkozy's UMP party, Jean-Francois Cope, said he looked forward to the second round.
From Monday "we will no longer be in a case of nine candidates against Nicolas Sarkozy, but we will be one-on-one, Nicolas Sarkozy against Francois Hollande ... then I think the match will be different."
The left has not won a presidential election in a quarter of a century, but with France mired in low growth and rising joblessness, opinion polls had long predicted the left would beat the right-wing incumbent.
Hollande says Sarkozy has trapped France in a downward spiral of austerity and job losses, while Sarkozy says his rival is inexperienced and weak-willed and would spark financial panic through reckless spending pledges.
The eurozone debt crisis and France's sluggish growth and high unemployment have hung over the campaign, with Sarkozy struggling to defend his record and Hollande unable to credibly promise spending increases.