A French court has decided to investigate new IMF chief Christine Lagarde's role in a $400m (£244 million) arbitration deal in favour of a controversial tycoon.
Ms Lagarde was France's finance minister when magnate Bernard Tapie won a settlement in 2008 with a French state-owned bank over the mishandled sale of sportswear maker Adidas in the 1990s.
A commission at the Court of Justice of the Republic decided today an investigation should be launched into her role.
A prosecutor has said he suspects she abused her authority in allowing the arbitration.
Ms Lagarde took over as managing director of the International Monetary Fund last month after her predecessor, Dominique Strauss-Kahn, quit to face charges he tried to rape a New York hotel maid.
France's Court of Justice of the Republic is a special court that convenes rarely and only to handle cases involving government ministers.
A senior prosecutor had requested an investigation in May, saying he suspected Lagarde overstepped her authority in allowing the arbitration to go forward.
Gerard Palisse, the head of the commission, announced the decision to reporters.
Lagarde's lawyer, Yves Repiquet, said she is not worried about the investigation and even welcomes it. "We'll get to the bottom of things. There will no longer be the least doubt," he told reporters after speaking with her by phone.
The possibility of a French investigation dogged Lagarde even before she was appointed to head the IMF.
Critics have said the case should not have gone to a private arbitration authority because it involved a state-owned bank, Credit Lyonnais, and that Lagarde should have questioned the independence of one of the arbitration panel's judges.
It is likely to take months before the investigation is completed and a decision is made on whether to send the case to the special court for a trial.
While Lagarde was finance minister, she won praise for her role in international negotiations during the global financial crisis and Europe's debt troubles.
After the legal troubles her predecessor Strauss-Kahn faced, Lagarde's IMF contract says she is "expected to observe the highest standards of ethical conduct" and "shall strive to avoid even the appearance of impropriety in your conduct."
Strauss-Kahn's contract did not include such language.