Top seed Federer, who had a first-round bye, made an unusual high number of unforced errors to fall to the unseeded Benneteau, ranked 49th in the world.
The elegant Swiss, who has never advanced past the quarter-finals of the indoor event, started well but then struggled, losing the second set in a tiebreak and falling a break down early in the third set.
Cheered on by a partisan crowd, Benneteau, who has never won an ATP singles title, took his chances and hit some amazing winners.
He sealed victory with an ace on the first match point to set up a third-round match against his compatriot Gael Monfils.
"I can definitely play much better but I can also play much worse," said Federer.
"It wasn't a bad performance. I think Julien went out and got the victory. I definitely had chances. I missed them.
"I'm not looking for excuses," added the Swiss, who asked for a challenge on match point, which confirmed Benneteau's serve was in.
"It's just tough. I don't have a good record here at Bercy and that showed maybe a little at the end. I was not feeling that comfortable."
World number two Rafa Nadal had earlier saved five match points before overcoming Nicolas Almagro 3-6, 7-6, 7-5 in a thrilling all-Spanish second-round battle.
Nadal, who has been hampered by injury worries and has not won a title since May, looked rusty at first on the fast indoor court of the Bercy hall but then recovered and braved the pain from a blister on his right foot.
ALMAGRO STRUGGLES
"One positive thing I've had in my career is my ability to win matches even when I'm not playing very well," said Nadal, who saved his five match points in the second set to force a tie break he won 7-2. "That's important and that's what I did today."
Almagro, who had his own problems and received treatment on a sore left thigh during the decisive set, fought until the very end and twice served for the match but struggled to move around the court in the last few games.
Nadal, who has won the French Open four times on the other side of town but never the Paris Masters, now plays another Spaniard in Tommy Robredo, who moved past former champion Tomas Berdych of the Czech Republic 6-4, 6-4.
Serb Novak Djokovic, the world number three, advanced by surviving a fightback by Argentine Juan Monaco to win 6-3, 7-5.
The 22-year-old Djokovic, who beat Federer in the Basel final on Sunday to win his fourth title this year, next faces Frenchman Arnaud Clement.
In late action, Britain's Andy Murray, the world number four, was made to work for over two hours by American James Blake for a 6-3, 6-7, 7-6 win and now faces Czech Radek Stepanek.
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