Paris: A French court on Thursday ordered a formal judicial probe into IMF chief Christine Lagarde's contested role in settling a financial dispute when she was France's finance minister.

Lagarde has denied exceeding her authority in the case, in which arbitrators awarded a big payout to a businessman. The court said it had ordered judges to investigate the allegations but did not immediately specify the charge.

The Court of Justice of the Republic, qualified to hear charges against ministers arising during their term in office, approved "a judicial inquiry concerning Mrs Lagarde," presiding judge Gerard Palisse told reporters.

Lagarde's lawyer Yves Repiquet said the inquiry was "in no way incompatible" with her new role as managing director of the International Monetary Fund (IMF), a global emergency lender.

He said he expected the case to be dismissed. Lagarde in June became the first woman head of the IMF, taking over from fellow French national Dominique Strauss-Kahn after he resigned following his arrest on attempted rape charges.

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 them to private arbitration.

The arbitration panel awarded Tapie, a supporter of Lagarde's then boss President Nicolas Sarkozy, 400 million euros (USD 560 million) in the case, linked to the bank's alleged mishandling of the entrepreneur's sale of the sportswear brand Adidas.

Under the French judicial system, the judges' inquiry ordered on Thursday could lead to Lagarde being charged with a criminal offence punishable by a jail term. That process would likely take several years.