A document published by left-wing investigative website Mediapart alleges the funds were paid towards Mr Sarkozy's 2007 presidential campaign by Libya's deposed leader.
But Mr Sarkozy, who referred to France's active role in the Nato campaign that helped overthrow Col Gaddafi's regime, told French TV channel TF1: "If he had financed it, I wasn't very grateful.
"It's grotesque and I am sorry that I am being interrogated about declarations of Gaddafi or his son on an important channel like TF1.
"When one quotes Mr Gaddafi, who is dead, his son, who has blood on his hands, that is a regime of dictators, assassins, whose credibility is zero... frankly, I think we have sunk low enough in the political debate."
The claims are made in a report based on testimony by a former doctor of a French arms dealer who is said to have arranged the campaign and follow similar allegations made by Col Gaddafi's son, Saif al Islam.
It came as Mr Sarkozy overtook Socialist challenger Francois Hollande for the first time in an opinion poll on the first round of France's April-May leadership election.
The poll, published after Mr Sarkozy attacked the European Union's trade and immigration policies, suggest the conservative incumbent would still lose to Mr Hollande in a second-round run-off, but by a narrower margin.
Meanwhile, far-right leader Marine Le Pen, ranked third in polls, said she had secured the 500 official sponsors needed to enter the presidential contest.
Candidates have until Friday to obtain the backing of 500 elected officials needed to compete in the April 22 first round, after which the two candidates with the most votes will contest a May 6 run-off.
A failure by Ms Le Pen to gather enough signatures could have had a significant effect on expectations, given her 16% support level.
Mr Sarkozy, who has trailed Mr Hollande in polls for months, saw an Ifop/Fiducial survey put his first-round score at 28.5%, compared to 27% for Mr Hollande.
But the poll gave Mr Hollande 54.5% of the second-round vote, compared to Mr Sarkozy's 45.5%.
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