Bernard Tapie, a one-time government minister, has been placed under formal investigation for organised fraud in a scandal that threatens to expose an alleged corrupt system of favours at the highest level of the French state during Nicolas Sarkozy's presidency.

In the soap opera of French political eccentrics, few are as colourful and controversial as Tapie: a rags-to-riches businessman who began as a failed popstar and wannabe racing driver, hosted TV shows, became a minister under François Mitterrand, owned Olympique de Marseille football club but then served time in jail for match-fixing, and finally reinvented himself as actor and now press baron, recently buying the newspaper La Provence.

After spending four days and nights in police custody for questioning this week, judges placed the 69-year-old under formal investigation and lodged preliminary charges for organised fraud over a €400m (£342m) state payout in 2008 while Sarkozy was president.

Investigators are examining whether the vast sum was deliberately rigged in favour of Tapie. For decades, he had fought the French state through the courts, alleging that the formerly state-owned bank Crédit Lyonnais had cheated him while handling his company's sale of the sports brand, Adidas. But Sarkozy's government decided to end the court battle and opt instead for private arbitration.

Tapie personally pocketed about €200m of the payout, after tax and costs, all paid for by the taxpayer. The scandal centres on whether or not there was an elaborate conspiracy which went as high as the Elysée in order to defraud the state and enrich Tapie, a powerful Sarkozy supporter who switched political sides in 2007 to back the latter's rightwing presidential campaign.

The saga is currently one of the biggest alleged corruption scandals in French politics. It has gripped the public imagination and triggered outrage because it underlines fears that an untouchable elite of politicians and businessmen connived together at the expense of the taxpayer. Tapie is alleged to have regularly gone to the Elysée and the finance ministry to make his case heard over the settlement. The French media have called it a "state scandal".

Tapie has repeatedly denied any wrongdoing. On Friday, his lawyers said the dossier had no substance. Three other people have been placed under investigation over their role in the out-of-court settlement, including a retired judge on the arbitration panel and Stéphane Richard, chief executive of the phone company France Télécom-Orange, who was a top aide to Sarkozy's finance minister Christine Lagarde.

Sarkozy has presidential immunity for any decisions taken while in office, but if he is alleged to have played a role before his presidency, while he was a minister, he could be questioned.

The Socialist government of President François Hollande also launched separate legal proceedings on Friday to challenge the Tapie payout in the Paris appeals court, raising the possibility that, if judges see fit, it could be annulled and Tapie be made to repay it.