The former prime minister was previously a ministerial colleague of Sarkozy's, but they clashed in the fight to succeed Jacques Chirac, the former president.
The fallout resulted in a court case in which Sarkozy accused Villepin of seeking to smear him by linking his name to a graft inquiry in order to derail his 2007 presidential bid.
Although Villepin was acquitted in January of a first charge of conspiracy to slander in the case, state prosecutors appealed and he will face a second trial, potentially disrupting any shot at the presidency in 2012.
Villepin's new party comes after Sarkozy was forced to reshuffle his cabinet following a heavy defeat in regional elections on Sunday.
The ruling UMP party took only about 36 per cent of the vote, while the Socialist party and its allies won around 54 per cent, leaving the UMP in charge of only one of France's 26 regions.
The vote was followed by a day of strikes by teachers, train drivers and civil servants to protest against unemployment, wages, the high cost of living and government plans to change the pension system.
Villepin has said his new party would stand for a more socially responsible conservatism and called for higher income and corporate taxes.
He also said Sarkozy should drop the "fiscal shield" that protects the wealthy from paying more than 50 per cent in tax.
An opinion poll this week in the daily Le Parisien put Villepin ahead of Sarkozy in a list of potential centre-right candidates, but there is widespread scepticism about him among mainstream centre-right politicians.
"I want to see if this is just an exercise in demolition aimed at a person or if it is a constructive enterprise aimed at creating better prospects for France," Michele Alliot-Marie, the French justice minister, told LCI television.