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On 12 July 2004, Domenech was a surprise choice to succeed Jacques Santini after the country's disappointing exit from UEFA Euro 2004 by losing in the quarter-final match to the eventual tournament-upset winners Greece. He was given the objective by the FFF to reach "at least" the 2006 FIFA World Cup semi-finals.
France struggled in the qualifiers, even though the team was seeded in a group that included the relatively unheralded teams of Israel and Switzerland. The Republic of Ireland were France's main contenders in the group, and looked like contributing to France's exit until Zinedine Zidane returned to inspire France[neutrality is disputed] to a 1–0 win at Landsdowne Road, ultimately ending the hopes of the Irish. Domenech had to forceClaude Makélélé, Lilian Thuram and Zidane, members of France's "golden generation," out of international retirement to aid the national team to eventually qualify. The general consensus in France, however, was that France was too dated a side to win the 2006 World Cup, despite the return of their cherished talisman, Zidane.
As a keen amateur dramatist and astrologer, Domenech has admitted to distrusting Scorpios, such as Robert Pirès. This led to the choosing of Vikash Dhorasoo who played an important part in qualifying but not in the finals. He later fell out with Dhorasoo after he made a behind the scenes film called "Substitute". His decision to leave out FC Barcelona star Ludovic Giuly in favour of Franck Ribéry, and subsequent refusal to explain that decision, left many French players and fans mystified. Domenech chose Pascal Chimbonda, a low-profile player with no face or international experience, for the squad. Domenech's selection for France's World Cup squad was further criticised when he publicly announced that Fabien Barthez would start ahead of Olympique Lyonnais goalkeeper Grégory Coupet. This decision was met with derision in the French press and also led to Coupet walking out of the national squad before the tournament, though he was later to return. His exclusion of Roma back-bone defender Philippe Mexès also raised a few eyebrows. Mexès, despite being named "Hope of the Year" in 2000 and being a starting defender for Roma since his arrival to the team, never played in a competitive senior tournament under Domenech.
France had a slow start in the World Cup, recording draws against Switzerland and South Korea before finally defeating Togo. However, France turned the corner after the victory against Togo and started to play passing possession football, as it had in its triumphs in the 1998 FIFA World Cup and UEFA Euro 2000. They shone in the knockout rounds, which included impressive victories over favoured Spain, Brazil, and Portugal. France lost the final to Italy in a penalty shootout following a 1–1 draw after extra time.
Recalled golden generation veterans Zidane and Thuram earned spots on the All-Star Team, with Zidane being awarded the Golden Ball for the best player of the tournament despite receiving a red card in the final (the voting was done before Zidane received the red card).
On 27 August 2007, Claude Makélélé's club manager, José Mourinho, stated that Domenech was treating Makélélé "like a slave," since Domenech had called him up for Euro 2008 qualifiers even though Makélélé had announced his retirement after the 2006 World Cup. Domenech responded, "As long as he can walk, he will play. I have the right to pick him." A 3–0 shutout of Georgia and a 3–1 defeat of Italy in the first Euro 2008 qualifiers took France back to the top of the World Football Elo Ratings. France ended up last in their UEFA Euro 2008 Group C and failed to advance in the tournament after losing to Italy 0–2.
In the first game of the finals, France drew with Uruguay 0–0. Following their draw with Uruguay, Zidane described Domenech as having lost control of the team. The draw was then followed by a 2–0 defeat to Mexico, during which striker Nicolas Anelka reportedly directed an expletive-laden tirade at Domenech. Anelka would be dismissed from the team the next day. The day after Anelka's dismissal, team captain Patrice Evra and team trainer Robert Duverne had a heated confrontation that caused Domenech to physically restrain Duverne; the players responded by returning to the team bus and refusing to continue with practice. After the French Football Federation condemned the player boycott, the team returned to practice without further incident. France's World Cup campaign ended with a 2–1 defeat to South Africa, meaning Les Bleus finished at the bottom of Group A without winning a single game. Domenech bowed out by refusing to shake the hand of South Africa's coach in the final game, Carlos Alberto Parreira.
Domenech has been seen by many French people as the worst coach in the country's footballing history.