During the five-day state visit, the two leaders are expected to sign deals worth over $15bn including arms co-operation and a nuclear-powered seawater desalination plant.
On Monday Yade, a junior member of the centre-right government, said France should demand guarantees on human rights in Libya when signing trade deals.
'Not a doormat'
"Colonel Gaddafi must understand that our country is not a doormat on which a leader - terrorist or not - can come and wipe the blood of his crimes off his feet," she told the daily Le Parisien.
"France should not receive this kiss of death."
Sarkozy said he shared Yade's conviction on human rights and that he had "reminded the Libyan president of that".
"I am also here to fight at the side of French businesses and factories"
Nicolas Sarkozy, French president
But he dismissed those who criticised his human rights record as idle, coffee-drinking intellectuals, saying he fought to change things.
Sarkozy invited Gaddafi - who has rarely been invited by Western governments - following Libya's decision to release six foreign medical workers who were detained for years after being accused of infecting children with HIV.
In defending the invite, Sarkozy said his aim of securing lucrative contracts for French firms would not prevent him from championing human rights.
"I am also here to fight at the side of French businesses and factories so that we have the contracts and orders that the others were so happy to have in our stead, without in any way renouncing my convictions on human rights."
France and Libya also signed contracts for Airbus aircraft estimated at about $3.17bn.
Ties between the countries have improved since Tripoli scrapped its weapons programme in 2003 and agreed to compensate the families of victims of bombings of US and French airliners.
On Monday, however, US legislators said Libya had not fully paid up and demanded full compensation for victims of the 1988 bombing of a Pan Am jetliner over Lockerbie, Scotland, which killed 270 people, and the 1986 bombing of a disco in Berlin, Germany.
The eight senators, including presidential candidate Hillary Clinton, urged the US secretary of state to ensure that full compensation was paid.
"To date, Libya has not fulfilled its commitments to these victims," they wrote to Condoleezza Rice. "There are also other cases ... that need to be resolved."
They added that the US was not ready for full normalisation of relations with Libya, after ties were severed in 1981.