Dominique de Villepin said he would form a new party this summer to challenge Sarkozy in the 2012 presidential elections. Both used to be members of former President Jacques Chirac's Cabinet but clashed over his succession and are now fierce enemies.

Sarkozy claims Villepin was behind a campaign that had tried falsely to accuse Sarkozy and others of hiding kickbacks in secret accounts in the Luxembourg bank Clearstream. In a trial that lasted more than five years, Villepin was acquitted but federal prosecutors have appealed the decision.

His announcement to challenge Sarkozy at the polls comes after voters punished Sarkozy's UMP in this Sunday's regional elections.

The Socialist-led opposition won 54 percent of the vote, compared to 36 percent for the UMP, which lost control over all but three of the 26 French regions. Two of those -- French Guiana in South America and Reunion in the Indian Ocean -- are not even in mainland France. France's extreme right, the National Front, reversed its years-long downward trend, winning double-digit support in most regions.

Sarkozy has been unable to convince voters of the need reforms as France is experiencing its worst economic crisis since World War II. In a bid to reduce the budget deficit and unemployment, which now towers at 3 million, Sarkozy has vowed to raise the pension age, cut retirement benefits and public wages. Those measures have proved unpopular with the people denouncing Sarkozy's reform course as too radical.

Villepin is trying to benefit from the frustration with the UMP and what Sarkozy's critics -- some inside his own party -- say is his hyperactive governing style.

"If we have a problem, it's not with one reform or the other, nor with the parliamentary majority nor the government. It's simply Nicolas Sarkozy," Francois Goulard, a right-wing parliamentarian and an ally of Villepin, was quoted as saying by Britain's Telegraph newspaper. "It's he that suffered a defeat. It's his methods and style that have been rejected by part of our electorate."

Ahead of his trip to the United States next week, Sarkozy is expected to reshuffle his Cabinet as a response to the election defeat. He met with Prime Minister Francois Fillon Monday in Paris to discuss new strategies.

A first move was announced afterward: Labor Minister Xavier Darcos, who lost the Aquitaine region, was replaced by Eric Woerth, the budget minister.

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