President Sarkozy is set for a showdown with Angela Merkel today after infuriating the German Chancellor with the launch of a €100 billion (£80 billion) French sovereign investment fund that he exhorted other European governments to copy.

Brushing aside Berlin's qualms, Mr Sarkozy yesterday outlined plans for the fund as part of a programme to strengthen public sector control over private business. He also promised €175 billion of direct state investment in the economy, over and above the sovereign fund, in the next three years.

Claiming that the financial turmoil had killed “the dictatorship of the market”, he pledged to lead Europe towards a new economic system, which opponents said bears a striking resemblance to the old French model of heavy state intervention.

Mr Sarkozy said the drive would be spearheaded by an investment vehicle - loosely described as a sovereign wealth fund - to be set up by the end of the year. The fund would “intervene massively each time a strategic company is in need of capital”.

“We cannot leave business at the mercy of predators,” Mr Sarkozy said. “What oil producers do, what China does, what Russia does, there's no reason that France should not do.”

However, critics said that, with budget debt of €1,200 billion, Paris did not have any wealth to spare.

In practice, Mr Sarkozy appears intent on merging a variety of existing state investment tools into a fund under the control of the Caisse des Dépôts et Consignations, the institution managing state savings accounts and pensions. The French Government said that the fund would be worth about €100 billion.

Mr Sarkozy's speech, made in the French Alps, put flesh on ideas floated before MEPs in Strasbourg this week, when he called for action to stop European company's from falling into foreign hands. He wants Europe's leaders to draw inspiration from the 2004 rescue of Alstom, the engineering giant, which he oversaw as Finance Minister. The French Government bought a €720 million stake; two years later, this was sold for €1.98 billion.

But the initiative has widened the rift between Berlin and Paris over how to handle the financial crisis.

A spokesman for the German Government suggested that the Gallic move might fall foul of European law. He said that Mrs Merkel would hold what is certain to be a frosty meeting with Mr Sarkozy to discuss the investment fund during the summit of EU and Asian leaders in Beijing today.

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