Palestinian President Mahmoud Abbas has said he would submit an application for full membership Friday to the United Nations as part of a statehood bid.
Washington said it was adamantly opposed to such a move, saying it would undermine peace negotiations with the Israelis.
Sarkozy, during his address to the U.N. General Assembly, said giving the Palestinians observer status was a good intermediary step, cautioning Abbas not to do anything to thwart the peace process.
"The ultimate goal of peace negotiations must be mutual recognition of two nation states for two peoples, established on the basis of the 1967 lines, with agreed and equivalent exchanges of land," Sarkozy said.
Richard Falk, U.N. special rapporteur on Palestinian human rights, said from Geneva that now was the chance for Israel, its "zealous backers in the United States" and other members of the international community to listen to the will of the Palestinians.
"Palestine's status as a state is not merely symbolic," he said. "It empowers Palestine with rights and duties under international law, such as full jurisdiction over its territory, legal standing to defend itself from other states and the capacity to join international treaties, including human rights treaties."
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