(Adds Sarkozy quotes)
PARIS, June 19 (Reuters) - French magistrates investigating an attack in Pakistan blamed on Islamist militants that killed 11 French nationals in 2002 are looking into allegations it was linked to corrupt deals, lawyers for the victims' families said.
A coach carrying French naval engineers and technicians was bombed as it left a hotel in Karachi in May 2002. The attack killed 14 people in total.
Pakistani authorities at first blamed Islamist militants and two men were sentenced to death for taking part in the attacks, but their convictions were overturned on appeal in 2003.
French magistrates Marc Trevidic and Yves Jannier told the victims' families they were now investigating allegations the attack was orchestrated by unnamed Pakistani officials angry with France over the non-payment of bribes tied to a defence deal.
"The investigating magistrates told us that they believed this scenario was extremely credible," one of the relatives' lawyers, Olivier Morice, told reporters.
According to these allegations, some kickbacks ended up in the campaign funds of then Prime Minister Edouard Balladur, a rival of Jacques Chirac in the 1995 presidential election, a judicial source familiar with the matter told Reuters.
President Nicolas Sarkozy was Balladur's campaign manager in the ballot and was also budget minister when the lucrative sales contract for the French Agosta submarines was signed.
He rejected on Friday the magistrates' suspicions.
"Listen, this is ridiculous," Sarkozy told reporters at a news conference after an EU summit in Brussels.
"This is grotesque ... We have to respect the grief of the families. Who would ever believe such a tale?" he added.
Balladur also denied any knowledge of wrongdoing.
Asked about the allegation by French state television, Balladur said: "As far as I am aware, everything was completely above board. I have nothing more to say. If anyone has any proof, let them speak up."
Lawyer Morice said the investigating magistrates had obtained a top secret internal memo in October 2008 from the state-owned shipbuilder which contained the allegations.
The memo, copies of which were shown on French media on Friday, says French and Pakistani officials connived to take bribes as part of the sale of the submarines to Pakistan.
It says France stopped paying the bribes after the 1995 election, won by Chirac, and that Pakistani officials kept asking for them for several years.
The allegation is that they eventually lost patience and organised in retaliation the attack on the bus full of French engineers, who were working on the Agosta submarine project.
Trevidic and Jannier cannot speak publicly about their investigation because the rules of their position forbid it. (Writing and additional reporting by Estelle Shirbon and Crispian Balmer)
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