Bernard Squarcini, the head of the Direction Central du Renseignement Intérieur – the French equivalent of MI5 – allegedly obtained the Le Monde reporter's telephone records to uncover a mole feeding the newspaper information about a political scandal.
Reporter Gérard Davet's contact was an adviser in the justice ministry who was passing on information about a legal investigation into whether L'Oréal heir Liliane Bettencourt had given Sarkozy allies wads of cash in brown envelopes to fund the presidential election campaign.
The investigative newspaper Le Canard Enchaîné claimed Sarkozy ordered the surveillance of journalists covering sensitive stories, but the Elysée firmly denied the allegation, which it described as "totally far-fetched".
Sarkozy, who promised an "irreproachable republic" in his 2007 election manifesto, cannot be summoned or questioned as a witness in the Squarcini investigation as he benefits from presidential immunity.
Squarcini, nicknamed the Shark, was said to have even obtained Davet's GPS locations from his mobile phone records. Le Monde alleges two other journalists were also illegally spied on.
The spymaster, who is part of Sarkozy's inner circle is facing charges of "breaching communications privacy", "unlawful data gathering" and "violating the professional secrecy".
Questioned by the judge on Monday, Squarcini reportedly denied breaking the law, saying the target was not the press but the civil servant who was "breaking the rules" by giving information to the reporter and possibly posed a threat to national security.
The investigating judge looking into the allegations is expected to question Fréderic Péchenard, France's chief of police, as a witness.
He may also be placed under official investigation.
Patrick Maisonneuve, Squarcini's lawyer, said his client had ruled out resigning from his post, ignoring calls to step down from the newly elected Socialist presidential candidate François Hollande.
"Can you imagine, the head of counter-espionage spying on journalists or public services," Hollande said in a television interview. "I'm shocked the interior minister has not asked for Mr Squarcini's resignation."
The prime minister, François Fillon, stressed that Squarcini had been put under investigation and should be presumed innocent until proven otherwise.
It is the latest in a series of damaging scandals to hit the French right, and specifically Sarkozy in the run-up to next year's presidential elections in which he is expected to seek a second term in office.
Another Sarkozy ally, the French state prosecutor Philippe Courroye was due to be questioned by the investigating judge and also risks being put under investigation, but his appearance has been postponed after questions of legal procedure were raised.