"We want to give negotiation every chance. If that works, then great. If that leads nowhere, then that won't be without consequences," he said, warning Iran that the international community was determined to make progress.
Speaking after a dinner with fellow Group of Eight leaders at which Iran was discussed, Sarkozy condemned what he called Tehran's "blackmail" over its holding of Western prisoners arrested following a post-election crackdown.
"The statement of the G8 is unequivocal," Sarkozy said, referring to international attempts to bring the Islamic republic to the negotiating table over its alleged plans to develop nuclear weapons.
"Between August and September it's for them to decide how they want things to evolve. Pittsburgh is the date," he said, indicating Iran had been set an informal deadline to respond to Western overtures before the next G20 summit.
"The Iranian regime refuses all hands offered to them."
Sarkozy also demanded Iran immediately release 23-year-old researcher Clotilde Reiss, a French citizen arrested in Tehran on July 1 and accused of "spying" over an email she sent to friends describing street protests.
The French leader described the charges against her as a "mere pretext" in order to put pressure on Paris, which has always denied that Reiss was involved in espionage.
Western efforts to step up pressure on Tehran have thus far been hampered by Moscow's reluctance to pursue tough measures, but Sarkozy said his Russian counterpart Dmitry Medvedev had been "constructive" on the issue.
"We have taken an immense step towards unity," he said. "We all think it would be a catastrophe not to resolve these issues through diplomacy and dialogue."
Western powers suspect Tehran of seeking to develop nuclear weapons behind the screen of what Iranian leaders describe as a civil nuclear energy programme and US President Barack Obama has offered to hold talks on the issue.
Tehran has so far rejected all overtures, however, and in the meantime the matter has been complicated by the political crisis in Iran, where authorities have launched a crackdown on protests against last month's election results.
Addressing the issue of the street protests, in which opposition supporters condemned alleged vote-rigging, Sarkozy saluted what he said was "the excellent news of the emergence of an extremely brave Iranian civil society."