Nicolas Sarkozy was today urged to break his silence over the most potentially damaging corruption scandal of his career: an inquiry into whether he authorised illegal kickbacks from arms sales to Pakistan to fund a political campaign.

L'affaire Karachi is the most explosive corruption investigation in recent French history and the biggest scandal to personally threaten Sarkozy.

The potent saga of suspect submarine sales and illegal kickbacks centres around a bomb attack in Karachi in 2002, when 15 people, including 11 French engineers, were killed in what judges believe was a retaliation attack over unpaid government bribes.

The families of the French victims urged Sarkozy to testify to investigating magistrates about what he knows. "At the top of the French state there is a fear of this dossier advancing because it implicates Nicolas Sarkozy and those close to him," said Olivier Morice, the families' lawyer.

The Socialist party demanded "clarity" from the president and the immediate release of state classified documents to the investigation.

The scandal dates back to 1994 when Sarkozy was budget minister in a government led by his ally and mentor, Prime Minister Édouard Balladur. The Balladur government sealed a deal to sell three Agosta 90 submarines to Pakistan for an estimated $950m.

To secure the contract large bribes were allegedly paid to Pakistani politicians and military, as well as commissions to middlemen. Paying commissions to intermediaries was not against the law at the time. But the key issue is whether around €2m of illegal kickbacks from the sale were secretly funnelled back to France to fund Balladur's unsuccessful 1995 presidential campaign. As budget minister, Sarkozy would have authorised the financial elements of the submarine sale. At the time he was also treasurer and spokesman for Balladur's campaign.

Renaud Van Ruymbeke, one of France's most ruthless independent investigative magistrates, is currently investigating the kickback allegations as well as claims that Sarkozy approved the setting up of a shadow company to channel money from the arms deals commissions to fund Balladur's political activities in France. The investigative website Mediapart has quoted a Luxembourg police investigation which found Sarkozy oversaw the setting up of two Luxembourg companies at the time.

Balladur lost the 1995 presidential campaign to his bitter enemy Jacques Chirac. From the Élysée, Chirac immediately set about dismantling the network of commissions and launched several secret inquiries into Balladur's possible use of kickbacks. He ordered that all the bribes to Pakistan must stop. In 2002 a bus carrying staff to the Karachi site where the submarine construction was being finalised was bombed. Fifteen people were killed, including 11 French engineers.

For years Pakistan blamed al-Qaida, as did the French government.

But a new anti-terrorist judge investigating the bombing, Marc Trévedic, has suggested a different theory: that the attack was likely to have been a retribution hit because France had stopped the commission payments.

In a significant move, Chirac's former defence minister, Charles Millon, this week confirmed to the inquiry that kickbacks on the arms deals existed.

French newspapers quoted his testimony: "For the Pakistani contract, looking at the secret service reports and analyses carried out by the [defence] ministry services, one has the absolute conviction that there were kickbacks."

Sarkozy and Balladur have flatly denied all allegations of involvement in the Karachi affair. Questioned at a press conference last year, Sarkozy flew into a rage, saying the suggestion that the French engineers were killed as retaliation for unpaid bribes was "ridiculous" and "grotesque" fairy tales. He said: "Let's have some respect for the grief of the victims. Who could believe a fable like that?"

Balladur, in a letter to Le Monde, said he had "no knowledge at all" about any commissions and that his campaign expenses had been approved by France's highest body.

The families of the victims have this week lodged a demand with Van Ruymbeke that he question not only Sarkozy, but Chirac and the former prime minister Dominique de Villepin.

They argue that even though Sarkozy is covered by presidential immunity, he can be heard as a witness.

The families say the investigation has been hampered by the highest levels of the state refusing to co-operate or to release classified documents.

Journalists investigating the case say their phones have been tapped and they have been followed by the security services.

This week Magali Drouet and Sandrine Leclerc, whose fathers were both killed in the bombing, released a book about their fight for justice.

Drouet said that when the inquiry began to focus on a likely retribution attack over unpaid bribes it was almost too much to bear.

"I asked myself how it was possible, the corruption lead seemed even worse than the idea that it was a blind attack," she said.

The families would continue to fight for the truth to be revealed, she added.

Long search for answers