Paris, Jun 4 (DPA): A broad investigation into a 2002 terrorist attack in Pakistan that killed 11 French naval engineers has linked French President Nicolas Sarkozy to a complex kickback affair.

As a result, the lawyer representing the families of the victims of that suicide bombing in Karachi has demanded that Sarkozy resign.

"We consider that Sarkozy lied to the families when he met with them," Olivier Morice told DPA. "The families are indignant. We think this was a state lie. Sarkozy must therefore resign".

Morice based his demand on the fact that the judges investigating the May 8, 2002 attack believe it was not part of Al Qaeda's terror war against the West, but rather the result of political infighting among French right-wing politicians, in which Sarkozy apparently played a major role.

According to the French online daily Mediapart, Luxembourg police have found that in 1994 Sarkozy, then budget minister under Prime Minister Edouard Balladur, set up an illegal offshore company to help finance his boss's upcoming presidential campaign.

Called Heine, the Luxembourg-based company was allegedly used to pay bribes to intermediaries in overseas arms sales by the French naval defence company DCN and funnel kickbacks from those deals back to France.

While paying bribes to foreign agents was legal at the time, kickbacks - or retro-commissions, as they are called here - were not.

"According to a document, the agreements on the creation of (Heine) appear to come directly from Prime Minister Balladur and Finance Minister Nicolas Sarkozy," the Luxembourg police file reportedly says, misidentifying Sarkozy's post.

More than 94.4 million francs (14.4 million euros, or currently $17.5 million) are believed to have flown back to France in kickbacks from weapons deals, including from the sale of three Agosta 90 submarines to Pakistan for an estimated $950 million.

"A part of the funds that passed through Luxembourg returned to France for the financing of French political campaigns," Mediapart quoted the police dossier as saying.

Some of that money is believed to have been used by Balladur in his unsuccessful campaign for the French presidency in 1995, which Sarkozy managed.

He was defeated in the first round by his conservative arch-rival Jacques Chirac, who went on to win the second round of the vote.

More important for the investigation into the terrorist attack, more than $80 million in bribes were allegedly to be paid to Pakistani politicians and military personnel in the submarine deal.

But when Chirac became president, he immediately shut down Balladur's alleged bribe-and-kickback system, leaving about 15 percent of the Pakistani bribes unpaid. Judges now believe that the Karachi bombing was a retaliation for non-payment of the bribes.

Morice said that one of the investigating magistrates, Marc Trevidic, told the victims' families last year that this theory was "cruelly logical".

Significantly, the 11 French nationals killed in the Karachi attack were there to complete work on the three submarines. (A total of 15 people died in the bombing, and another 40 were injured.)

French government spokesman Luc Chatel labelled the reports about Sarkozy's involvement in the affair as "grotesque".

"The president of the Republic has expressed himself in the past and said these are just fables," Chatel said Thursday in a televised interview. "The president has nothing to do with this affair".

However, Morice said that the Luxembourg police report "demonstrates" that the president's implication was not a fable.

"I am certain that the operation he put in place when he was budget director played a central role in the affair," he said.

Opposition politicians have demanded a formal investigation into the kickback allegations, but this is unlikely to happen. For one thing, the parts of the police file cited by Mediapart provide no proof for the allegations.

In addition, most of the French government documents linked to overseas arms sales are classified as state secrets, and this veil is unlikely to be lifted as long as Sarkozy or any other right-wing politician is president.