So is Sarkozy likely to seek re-election?
Yes. Rumours of him retiring are bullsh**t. Sarkozy, like all French politicians, are egomaniacs who only fully retire once they die.
And I take it no one will seriously challenge him for the party's nomination, right?
Unless if you count Villepin as a inter-party challenge, no. The UMP itself is controlled by Sarkozy and his allies. But, as Fab says, there could be a centre-right candidate in Morin or Borloo; but it is well known that Sarkozy is a big supporter of a united right and wants only one candidate.