Mr Sarkozy, who also heads the ruling party, was wrongly accused of holding secret foreign bank accounts.

The so-called Clearstream Affair has dominated French news for two weeks.

There have been reports that PM de Villepin and President Chirac ordered a secret inquiry to see if allegations against Mr Sarkozy were true.

The French government is mired in an embarrassing and debilitating scandal centring on reports of an internecine smear campaign between its own leading members.

Fake list

The public is bewildered, the opposition socialists are making hay, but Mr Sarkozy, a man who is often portrayed as the great hope of the right, has decided that for now, he is not going to jump ship.

He believes, with plenty of evidence to back it up, that he is the victim of a bid to blacken his reputation ahead of next year's presidential elections in which he is a leading candidate.

Somehow his name ended up, two year ago, on a list of secret account holders at the Clearstream Bank of Luxembourg. The list turned out to be fake.

But in the last two weeks, evidence has emerged of how his rivals in the ruling party, President Jacques Chirac and Prime Minister Dominique de Villepin, may have tried to exploit the allegations against Mr Sarkozy for their own ends.

They are accused of setting up a secret investigation by a top intelligence official in early 2004 to see if the Clearstream claim stood up.

With the government's popularity plunging, there is a lot of temptation for Mr Sarkozy to resign and pose as a candidate of change and renewal at next year's election.

But he told a party gathering in Paris that resigning would precipitate a worse crisis that would help only the extremists and the political left.

"I want justice, real justice, not political vengeance," he said.