Sarkogate? Le Mondegate? L'Oréalgate? Evidence continued to pile up yesterday that President Nicolas Sarkozy's office abused its powers, and broke the law, to staunch newspaper revelations flowing from the convoluted (but endlessly fascinating) L'Oréal family feud and political financing scandal.

The comparison with President Richard Nixon and the Watergate affair of the 1970s may be something of a stretch. Consider, however, the similarities.

A beleaguered President has been directly challenged by the country's leading liberal newspaper. (Le Monde in Mr Sarkozy's case; The Washington Post in the case of Nixon.)

The presidency stands accused of misusing the security services to pursue narrow political interests. A head of state who makes law and order his political battle cry has been accused of breaking his country's laws (twice over, if you include Sarkozy's harebrained campaign against Roma immigrants, formally condemned yesterday by Brussels).

The comparisons with Watergate should not be pushed too far. Richard Nixon set out in 1971-72 to manipulate an entire presidential campaign. The US president's men robbed and lied and smeared.

The French President's men and women are accused "only" of sending the counter-intelligence services on a witch-hunt to track down the source of embarrassing leaks. They are accused "only" of breaking a century-old French law guaranteeing press freedom, and the privacy of media sources, which had been renewed and reinforced in January of this year.

In terms of recent French political history, the whole affair could be seen to be refreshing. Successive French presidencies are known to have manipulated the security and intelligence services for doubtful political causes (from the attack on the Rainbow Warrior in Auckland Harbour in 1985 to the attempts to smear Nicolas Sarkozy himself in the Chirac era). In the past the French media, confronted with such abuses, has often been supine and occasionally supportive.

The decision of Le Monde to challenge President Sarkozy head-on was robust and courageous and long overdue. The rising power of radical investigative websites in France has, it seems, stiffened the spine of the traditional media. It is doubtful whether the Le Monde of 20 or 30 years ago would have taken such a step.

In 2007, Mr Sarkozy promised France a different kind of politics and a different kind of presidency. The old Mitterrand and Chirac act of being in office but remote from power and reality would no longer wash, he said. He would be more transparent, more accountable and more directly responsive to real people and real problems.

Three years on, President Sarkozy's fitful efforts at reform have been submerged – or discredited – in the minds of many French people by a catalogue of erratic self-indulgence. From his efforts to promote his 23-year-old son to a senior political position to his abrupt attempts since July to link "crime" and "foreigners", the President's actions have veered from the crassly vain to the crudely populist.

Since the early summer, the L'Oréal affair, and related allegations about illicit financing of Mr Sarkozy's 2007 presidential campaign, have brought the mood in the Elysée palace to a new pitch of paranoia. And everything connects. The ill-conceived campaign against the Roma was driven partly by Mr Sarkozy's desire in July to divert the national conversation away from his alleged illicit funding by France's wealthiest woman, the L'Oréal heiress, Liliane Bettencourt.

On Monday, Le Monde claimed, in a front page which might have been headlined "J'accuse", that it had also been a victim of the Elysée's paranoia. The newspaper said that it had evidence that the President's office had "misused" the French counter-intelligence service to track down the source of one of its exclusive stories on the Bettencourt affair in July.

The source, a magistrate working in the justice minister's private office, David Sénat, had since been limogé, or internally exiled, in classic French style: dispatched to a non-job in French Guyana. Le Monde said it had started a legal action against "persons unknown" in the presidential office for breaking a law from the 1880s – renewed in January – which guarantees the privacy of press sources.

The Elysée immediately and angrily denied it had ordered any such witch-hunt. It could not, however, deny the sacking of such a senior official as Mr Sénat. He is a long-time leading adviser to the justice minister, Michèle Alliot-Marie (and co-author of a book critical of Mr Sarkozy's role in the Clearstream "smear" scandal).

The head of the counter-intelligence service, Bernard Squarcini, admitted yesterday that the investigations had taken place and that Mr Sénat had been identified by his agents as Le Monde's mole. French fixed-line and mobile telephone operators had been ordered to hand over the phone records of all suspected leakers in the administration.

Mr Squarcini said that he had been following the orders of the director general of the French police, Frédéric Péchenard. Both men are long-time acolytes of President Sarkozy. Both said that they had received no instructions from the Elysée. Both said they were acting only to protect national security.

From what? From leaks politically embarrassing to the President? No, they said, from the possibility that the leaker might reveal even more sensitive state information in the future.

This hastily erected defence was immediately demolished by Le Monde itself yesterday. Mr Péchenard said that he had acted with the approval of a "qualified person" in the state body which polices bugging, phone-tapping and other intrusive activities by the security services.

The Commission nationale de contrôle des interceptions de sécurité (CNCIS) told Le Monde that no such authority had been given. Or could have been given.

The delegate general of the CNCIS, Rémi Récio, a magistrate, said permission to examine phone records could only be granted as part of an approved investigation of a terrorist or security threat. Neither applied in this case, he said. Without permission any request to hand over phone records was illegal.

The Elysée Palace, the French government and members of Mr Sarkozy's centre-right party spent yesterday trying to stamp out the flames. They rejected Le Monde's accusations as absurd and baseless. Surely any government had the right to protect confidential information? By mounting an inquiry – which was nothing to do with the Elysée, they insisted – the security service was simply mole-hunting as any government would. They were not attacking Le Monde or the privacy of its sources.

This defence was also undermined by a senior legal officer by the end of the day. The chief public prosecutor for the Paris area, Jean-Claude Marin, revealed that, even before Le Monde's front page on Monday, he had written to the security service questioning the legal basis of its investigation. He said that the Direction Centrale du renseignement intérieur (DCRI) had sent him a brief note last month saying that it had tracked down the mole through "simple technical verifications". Mr Marin said that he had demanded to know what these "verifications" were. He had not yet received a reply.

All in all, the Elysée's "cover-up" appears to have survived for less than a day. Richard Nixon, one feels, would have done better than that.

The main opposition leader, Martine Aubry, first secretary of the Parti Socialiste, said yesterday that the Sarkozy administration had made "lies" into "the ruling principle of the state". "The rule of law is being overturned," she said. "We must have a complete inquiry."

The Green Euro MP, and potential presidential candidate Eva Joly – herself a former investigative magistrate – said: "The Bettencourt scandal turned into the Woerth scandal and it has now turned into Sarkogate."

Twenty-one months before the next presidential election, the latest polling data makes bleak reading for the President. Taken before the latest allegations, a CSA poll for Le Parisien found that the possible Socialist challenger, Dominique Strauss Kahn, was admired by 56 per cent of French voters, compared to only 25 per cent for Mr Sarkozy. Worse, only 15 per cent of those questioned picked Mr Sarkozy from a list of possible centre-right candidates – the same score as his detested rival, the former prime minister Dominique de Villepin.

But why was the Elysée so determined to silence Le Monde? Why does the Bettencourt affair appear to drive the President and his men to such ill-considered lengths?

To recap briefly ...

Liliane Bettencourt, 87, is the principal shareholder in the world's largest cosmetics company, L'Oréal. Two years ago her only child, Françoise Bettencourt-Myers, brought a legal action suggesting that her mother's "mental weakness" was being abused by a playboy photographer who had befriended her, François-Marie Banier. It emerged that Ms Bettencourt had given Mr Banier, 63, almost €1bn (£837m) in cash, life insurance policies and art masterpieces.

In July the family feud exploded into a political scandal. A former butler in the Bettencourt mansion had secretly recorded conversations between the old lady, Mr Banier and her advisers. He gave them to her daughter who sent them to the police. Long extracts appeared in an investigative website, Mediapart, and in the magazine Le Point.

The tapes suggested that Ms Bettencourt was, at best, mentally vague. They also suggested that her chief financial adviser, Patrice de Maistre, had made contributions on her behalf to Mr Sarkozy's 2007 presidential campaign. In return, it was suggested, Mr Sarkozy had intervened personally to block a criminal investigation of Mr Banier's influence on the old lady.

His party treasurer, Eric Woerth, had not only solicited campaign funding from Ms Bettencourt. He had also asked for a job in her wealth-management team for his wife. In return, Ms Bettencourt's advisers were overheard saying, she could expect favourable treatment for their schemes to help her to evade taxes.

A few days later a former accountant in Ms Bettencourt's private office told investigators that Mr Woerth – ie. the Sarkozy campaign – had received illicitly large donations from the L'Oréal heiress. The accountant, Claire Thibout, was also quoted by Mediapart as saying that large cash payments had been made to Mr Sarkozy in person before he was President. Ms Thibout later withdrew this allegation.

The treasurer, Mr Woerth, denied all charges and refused to resign as employment minister. Ms Bettencourt's financial adviser, Mr de Maistre, was questioned by investigators. In mid-July, Le Monde published a series of articles by its reporter Gérard Davet quoting from the confidential transcripts of Mr de Maistre's answers. They partially undermined Mr Woerth and the Elysée's denials of all involvement in the affair.

President Sarkozy is said to have been furious. The Elysée had earlier leaked a truncated version of other confidential testimony which supported its case.

Suspicion immediately fell on the private office of the justice minister, Michèle Alliot-Marie. Previous leaks in the Bettencourt affair were thought to have come from that source, the Prime Minister François Fillon revealed yesterday to a stormy session of the National Assembly. Although he again denied that the Elysée had ordered a mole-hunt, he said: "Repeated leaks from the justice minister's office are entirely against the law. It is normal for journalists to investigate but no government can allow a magistrate to violate the secrecy guaranteed during [judicial] investigations."

Mr Fillon did not point out, however, that the government's own leaks of favourable Bettencourt testimony to a "friendly" newspaper, Le Figaro, were equally illegal.

The Bettencourt affair continues to wind its way through two judicial investigations, one controlled by a prosecutor regarded as Sarkozy-friendly and one led by an independent-minded judge. In a further reverse for the Elysée yesterday, efforts to wind up the independent judge's parallel investigation were rejected by the appeal court in Versailles.

Mr Sarkozy's campaign against the Roma, attacked as illegal by the European Commission yesterday, was meant in part to sweep the Bettencourt-Woerth story from the news. The President's reputation, at least abroad, has been deeply damaged by the crude anti-Roma campaign.

Now the Bettencourt affair has been swept back into the headlines, not by any new development but by allegedly illegal efforts to suppress leaks by the Elysée Palace itself.