A French court has given the green light for an embezzlement investigation targeting new International Monetary Fund chief Christine Lagarde, in a case her lawyer branded as politically motivated.
Lagarde, who took up her new post last month, has denied any wrongdoing or illegality in a case which resulted in a big compensation payment for a private businessman out of public funds in 2008 when she was France's finance minister.
The IMF's executive board immediately expressed confidence in the 55-year-old, whose immediate predecessor at the organisation, Dominique Strauss-Kahn, resigned after he was accused of attempted rape.
Gerard Palisse, the presiding judge at the Court of Justice of the Republic, said the tribunal had approved "a judicial inquiry concerning Mrs Lagarde," in which magistrates would investigate her role in settling the financial dispute.
Such an inquiry can lead to criminal charges, which in this case would be punishable by up to 10 years in prison and a fine of 150,000 euros ($212,000).
State prosecutors in a statement detailed the charges as "embezzlement of public funds" and "complicity" in falsifying documents, and said prosecutor Cecile Petit would formally request the probe "in the coming days".
Lagarde's lawyer Yves Repiquet said the second charge was related to changes made to legal documents which affected the outcome of the contested financial settlement. Both charges were unfounded, he said.
He complained that the case was driven by "suspicion abusively cast on Christine Lagarde by a handful of opposition members of parliament for political ends" and said he expected the case to be dismissed.
Repiquet also insisted the inquiry was "in no way incompatible" with Lagarde's new role as managing director of the IMF.
The IMF is the global lender of last resort with a key role in calming the effects of the financial crisis on public finances in Europe.
"I have a perfectly clear conscience" about the affair, Lagarde said in June. "Whether the investigating magistrates decide to pursue an inquiry or not, I am just as confident and calm," she added the following month.
Lagarde became the first woman head of the IMF, taking over from her compatriot Strauss-Kahn - another former finance minister - after he resigned after being accused of trying to rape a hotel chamber maid.
Opposition politicians in France welcomed the news of the investigation.
Jean-Marc Ayrault, the president of the opposition Socialist group in parliament, said the decision to open the investigation "confirmed the existence of anomalies and irregularities in the management of this dossier."
It was a group of Socialists who asked the court to consider a probe.
"The French have the right to know if decisions have been taken in violation of the public interest," Martine Aubry, a contender for the Socialist nomination for the presidency, said in a statement.
And Francois Bayrou, leader of the Centrist Modem Party, welcomed the development as a "decisive step on the path to the truth".
In a statement after Thursday's announcement, the IMF board said it had already reviewed the issues in the case when it weighed Lagarde's candidacy.
"It would not be appropriate for the board to comment on a case that is currently before the French judiciary," it said.
"However, the board is confident that she will be able to effectively carry out her duties as managing director."
Lagarde has been accused of exceeding her authority by cutting short a legal battle between flamboyant French tycoon Bernard Tapie and the formerly state-owned bank Credit Lyonnais by sending it to private arbitration.
The arbitration panel awarded compensation to Tapie, a supporter of Lagarde's then boss, President Nicolas Sarkozy, in the case, linked to the bank's alleged mishandling of Tapie's sale of sportswear brand Adidas.
The total payment was around 400 million euros ($560 million), though Tapie is thought to have pocketed less.
Under the French judicial system, the magistrates' inquiry could lead to Lagarde being formally charged and possibly tried with a criminal offence. That process would likely take several years.