Mr Sarkozy’s Socialist rival, described by the Economist magazine as “the rather dangerous Monsieur Hollande”, had captured between 52 per cent and 53.3 per cent of votes and Mr Sarkozy had an estimated 46.7 per cent to 48 per cent in a sample of results on Sunday evening.
Francois Hollande’s victory marks a swing to the left at the heart of Europe, heralding a fightback against German-led austerity. Mr Hollande campaigned on a promise of a 75 per cent tax on French millionaires, and it remains to be seen whether he will modify his agenda to please French bond holders.
Polling stations closed at 8pm (1900 GMT) in the second and final round of voting, with France estimating a turnout of more than 80 per cent.
President ‘Bling Bling’
Mr Sarkozy, 57, had promised to retire from politics if he lost the race, the most bitterly fought campaign of his political life. Centrist candidate Francois Bayrou complained the conservative president was so desperate he pandered to the far right.
Voters held Mr Sarkozy responsible for 12 per cent unemployment and economic troubles that have seen supporters turn against their leader, nicknamed “President Bling Bling”.
“We are seeing real punishment of those governments which were saddled with handling the economic and financial crisis. And France is no exception,” said Jorge Crespo, a political science professor in Madrid.
The spectacular rise of Mr Hollande from the backroom of the Socialist Party amid the sex scandal engulfing Dominique Strauss-Kahn has been swift.
He had been spun as a reform-minded moderate, a compromise seeker, and a figure sometimes likened to former UK prime minister Tony Blair.
That was before Mr Hollande, 57, announced his plan for a 75 per cent tax on millionaires. But amid much speculation that a left-leaning leader would ignite “eurogeddon” and send rich Parisiennes fleeing to ‘Angleterre’, the bond markets have been sanguine about Mr Hollande’s chances.
“Two days before the elections, France borrows 10-year debt at the lowest rates in months,” Mr Hollande has said. “Markets aren’t scared of us.”