The 64-year-old individual, who reportedly uses a male first name but has asked to remain anonymous, appeared before magistrates in the north-central town of Orleans.
The plaintiff was born with a "rudimentary vagina" and a "micropenis" with no testicles, but was labelled a male at birth.
A court last August established the plaintiff's right to use the term "neutral gender" on official documents in the case, a first in France.
The state prosecutor decided to appeal the decision, saying that while he was not fiercely opposed he felt a higher ruling was necessary in a case that "collided with current laws".
After the closed-door hearing on Friday, lawyer Mila Petkova said:
"The court was very receptive. We were able to develop our arguments and we are happy at how the debate unfolded."
No date was given for a decision in the case.
In August, the magistrate stated that the "sex assigned to the individual at birth appears to be a complete fiction... imposed throughout (the plaintiff's) life.
"It does not amount to recognizing the existence of any kind of third sex, but to take into account the impossibility of attaching one sex or another to the concerned party," the magistrate added.
The plaintiff, who is married with an adopted child and lives in eastern France, spoke to the free Paris daily 20 Minutes in October.
"As a teenager I understood that I was not a boy. I didn't have a beard, my muscles didn't build," the individual said in an exclusive interview.
"Today I finally feel I am recognized by society for who I really am."
The plaintiff told 20 Minutes that at age 35, after doctors administered testosterone: "My appearance became more masculine. It was a shock, I no longer recognized myself. It made me realize I was neither a man nor a woman."
Several countries including Germany, Australia, New Zealand and Nepal officially recognize a third gender on official forms.
India, Pakistan and Bangladesh also have an official third gender designation for so-called hijra citizens who do not identify as male or female.