The entrepreneur was granted bail on condition he pays five million euros, reports twice a week to police and does not leave French territory.
Paris prosecutor Laure Beccuau said the judge found there were grounds to formally investigate Durov on all the charges for which he was initially arrested four days ago.
They include suspected complicity in running an online platform that allows illicit transactions, images of child sex abuse, drug trafficking and fraud, as well as the refusal to communicate information to authorities, money laundering and providing cryptographic services to criminals.
Being placed under formal investigation in France does not imply guilt or necessarily lead to trial, but indicates judges consider there is enough evidence to proceed with the probe. Investigations can last years before being sent to trial or shelved.
The judge's decision came after Russian-born Durov was arrested at an airport near Paris on Saturday evening.
His detention has fuelled debate on where freedom of speech ends and enforcement of the law begins. It also underlines the uneasy relationship between governments and Telegram, which has close to 1 billion users, while serving as a warning shot to tech titans who refuse to comply with authorities over alleged illegality on their platforms.
Beccuau said Telegram had been used in various criminal cases, and that the "almost total lack of response from Telegram to judicial requisitions" eventually caught the attention of the cybercrime unit at the Paris prosecutor's office.
"Other French investigation services and public prosecutors' offices as well as various partners within Eurojust, in particular Belgian ones, shared the same observation," about Telegram's lack of compliance, Beccuau said.
That prompted the Paris prosecutor's organised crime office to open a probe "into the possible criminal liability of the managers of this messaging service in the commission of these offences," she said in her statement.
The probe began in February, with the investigations carried out by the National Office for Minors, with an introductory indictment in July, Beccuau said.
Telegram has barely commented on Durov's arrest.
In a statement on Monday, it said it abided by European Union laws and its moderation was "within industry standards and constantly improving."
"Telegram's CEO Pavel Durov has nothing to hide and travels frequently in Europe," it said. "It is absurd to claim that a platform, or its owner, are responsible for abuse of that platform."
The arrest of Durov, who has French as well as Russian nationality, has had a major impact on ties between Paris and Moscow.
France has accused Russia of trying to destabilise it ahead of the Paris Olympics in response to its more hawkish stance on the Ukraine war - claims Russia has denied.
Kremlin spokesman Dmitry Peskov told reporters on a conference call on Tuesday that Russia was ready to provide Durov with all necessary assistance given his Russian citizenship, but that his French citizenship complicated the situation. Durov also holds a UAE passport.
Telegram has become crucial to battlefield communications in the war in Ukraine and is used by governments and soldiers on both sides of the conflict to share news and propaganda.
It presents itself as a haven for free speech, but is also widely used by far-right, anti-vaccination and conspiracist movements, as well as political dissidents.
French President Emmanuel Macron, who is known to be an avid user of the app, has said Durov's arrest was "in no way a political decision," adding France supports lawful free speech.
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