A judicial source with direct knowledge of the case told The Associated Press that Sarkozy was being held at the Nanterre police station, west of Paris.
Police are investigating alleged irregularities over the financing of his 2007 presidential campaign.
Nicolas Sarkozy, the former president of France, was taken into police custody on Tuesday morning in connection with a probe into the financing of his successful 2007 presidential run, according to a person close to the investigation.
A lawyer for Sarkozy could not be reached immediately for comment.
It's the first time Sarkozy's been questioned since the investigation opened in 2013.
Investigators are examining claims that Gadhafi's regime secretly gave Sarkozy 50 million euros overall for the 2007 campaign.
France has a 21 million euro spending limit for elections strict rules on foreign donations.
In March 2011, Saif al-Islam Gaddafi, the late dictator's son, told Euronews: "Sarkozy has to give back the money he accepted from Libya to finance his electoral campaign".
Sarkozy, who served as president from 2007 to 2012, has always denied receiving any illicit campaign funding and has dismissed the Libyan allegations as "grotesque".
The development came several weeks after a former associate, Alexandre Djouhri, was arrested in London and later released on bail. This, however, was the first instance of Sarkozy being questioned.
In February 2016, he was handed preliminary charges by French magistrates for suspected illegal overspending on his failed 2012 re-election campaign and ordered to stand trial.