Speaking at a Paris campaign rally, the president said that reform was the only way to avoid the “implosion” of Europe.
He said that unless there is progress in the next 12 months, then France would suspend participation in the Schengen agreement.
The accord allows passport-free travel among 25 European nations.
Illegal immigration has been a key issue ahead of the presidential election.
Last week Mr Sarkozy said there were too many foreigners in France – and pledged to halve the number of immigrants arriving if he is re-elected later this year.
The first round of voting is on 22 April. He is lagging in the opinion polls far behind the Socialist candidate, Francois Hollande.
The European Commission is due to submit a report on the operation of the Schengen system in May.
Mr Sarkozy also called for a “Buy European Act” that would require governments to favour European-made products.
He said: “France will ask Europe to adopt a ‘Buy European Act’ on a model of the ‘Buy American Act’.
“That way companies that produce in Europe will benefit from European state money.”
source: BBC © 2012